Economy

Private deals signal cracks on the iron ore pricing front

By Zhang Qi and Zhou Yan (China Daily)
Updated: 2010-04-27 09:49

A worker at a steel mill in Huaibei, Anhui province. Soaring iron ore prices have haunted domestic mills and raised concerns that profit margins may shrink over the long term as steel prices decline. [China Daily]

Some steel mills sign contracts with big miners for raw material supplies

BEIJING - Many Chinese steel mills have privately accepted the quarterly pricing system for iron ore, indicating an end to this year's ore negotiations.

"Some steel mills, including us have accepted the new quarterly pricing system, based on the previous three months' average spot prices," said a sales executive from a large Chinese steel mill.

"The China Iron and Steel Association (CISA) has issued a document asking steel mills not to sign iron ore contracts with the three big miners until the final negotiations are completed. But we cannot stop production and hence most of the steel mills have signed contracts privately like they did last year," the executive said.

The three miners - Vale, Rio Tinto and BHP Billiton- broke the 40-year tradition of selling iron ore on an annual contract basis this year and opted for a quarterly pricing system.

Earlier reports said Vale, the biggest supplier, won a 90 percent price increase from Japanese mills for quarterly contracts starting April 1.

Chinese steelmakers have opposed the move, with CISA asking for a boycott of the big three miners. The Ministry of Commerce also said a long-term system should still be the foundation for the negotiations.

China failed to reach an agreement last year with BHP, Rio and Vale after China's steel lobby CISA insisted on a 45 percent discount over 2008 prices.

Domestic steel mills, however, signed individual contracts with the big three miners on a 33 percent cut accepted by other Asian steel mills.

Soaring iron ore prices have haunted domestic mills and raised concerns that profit margins may shrink over the long term as steel prices decline.

According to Shanghai Securities News report, domestic steel makers have adopted the quarterly procurement price for offshore ore from Brazil at a price of $110.

The price growth will lead to a 90 billion yuan ($13.18 billion) increase in spending this year for the domestic steel industry, the report said. The entire industry posted a net profit of 69 billion yuan in 2009.

Mysteel's composite steel price index, a major gauge of domestic steel prices, dropped 169 points last Friday, down 0.6 percent from the previous week, after the government released fresh macro economic policies to curb the domestic property market.

Analysts estimated that the uptrend in iron ore prices would not be long-lived, as most traders have started to show pessimism on market prospects.

Spot iron ore prices may drop by 30 percent in the coming weeks on concern that China is taking measures to slow its economic growth, UBS AG wrote in a recent report.

Li Yizhong, minister of industry and information technology, warned in early April that the country must remain cautious on the rising domestic industrial product prices as it may hinder the 3 percent growth target for the consumer price index this year.

Cash prices for 63 percent iron ore from India to China, the world's biggest buyer, may drop to $130 a dry metric ton, including freight, according to UBS.

Spot price for 63.5 percent iron ore traded at $185-187 on Monday, according to prices from Mysteel.com.