Smaller steel mill owners in limbo

RIZHAO: One of the more controversial organizations in the recent wrangling over the price of iron ore that led to the arrest of four Rio Tinto executives in China remains open, but there is now no nameplate on the door.

The Rizhao International Iron Ore Trading Center, located on the fourth floor of China Construction Bank in a development zone in the Shandong port city, was seen as an attempt by small Chinese steel makers without their own import licenses to cut their own deals on the international markets.

The small steel mill owners are often the forgotten victims of the failure in recent months of the China Iron and Steel Association (CISA) to reach an agreement with the big iron ore producers: the Australian mining company Rio Tinto, the British-Australian BHP Billiton and Brazilian company Vale.

Iron ore is piled up at Rizhao port in East China's Shandong province. Rizhao is one of the country's major port cities for imports of iron ore from other countries. Asianewsphoto

They have been left trying to get iron ore at any price, often at inflated levels, from the traders and big steel producers, which could make up for having to pay a higher price themselves by selling their iron ore at a premium to the little guys with nowhere to go.

While China's dispute with the international mining companies raged in boardrooms around the world, they still had steel mills to fire up.

The iron ore trading center was opened in May by three local iron ore traders, Huaxin Gongmao, Wanbao and Zhongrui, as well as two e-commerce companies.

The deal was seen as an attempt to get price information for the smaller steel companies that were without their own import licenses.

The CISA attempted to close it at birth, however, warning in June that the center should stop engaging in speculative activity outside its operating rules.

In a statement on its website, the CISA alleged the center had exceeded its legal scope and had issued misleading information about its operations.

The trading center has maintained that it was only set up to provide electronic commerce services for iron ore suppliers, steel makers, domestic steel plants and foreign mining firms.

Liu Xiangwei, a local businessman who has been friends with the founders of the three iron ore trading companies for more than 10 years, said it was not viable for the center to trade iron ore.

"It is impossible for the center to conduct iron ore trading business with only 20 million yuan in registered capital," he said.

"I know each of them has floating assets of over 1 billion yuan. If they want to do iron ore trading business, why don't they operate the business by themselves. "

Su Qian, founder of Longqian E-commerce Company, one of the companies behind the center, insists there was no hidden agenda.

"We started the Rizhao trading center as an electronic commerce service provider and planned to charge fees for information, rather than run a trading business. I don't know why the center is paid so much attention, " Su said.

Price dispute

The dispute over the international iron ore price that has so disrupted the smaller steel makers, as well as the industry, escalated in May when the CISA insisted on a bigger price cut than the 33 per cent agreed by the Japanese and South Koreans.

It became even more heated last month when four Rio Tinto executives were arrested in China on alleged spying charges. They were accused of gaining information about China steel production targets to boost their negotiating strength.

While holding out for a 40 percent cut, the iron ore spot price soared, making a better deal unlikely for China.

In the meantime, the smaller Chinese steel makers without their own import licenses were finding themselves forced to buy their ore from the bigger companies that had them.

Peter Markey, a mining analyst at Ernst & Young in Shanghai, said most of the pressure fell on China's smaller steel companies during the crisis.

"The guys who have steel mills and no licenses have been basically stuck. Those who have licenses don't really mind what they pay. They pay the Australians 'x' and then charge the local companies 'x' plus a percentage. It doesn't really matter to them what 'x' is," he said.

Bernhard Hartmann, president and energy practice leader of A.T. Kearney Greater China, said the last thing the CISA wants is a fragmented market.

"They want to put on as much of a unified front as possible. It would not be an ideal situation from a Chinese perspective to have a lot of small inexperienced steel mills going up against a unified front of three major iron ore producers," Hartmann said.

The CISA wants a wholesale reform of the current iron import licensing system, which has led to more than 100 licenses being issued.

It wants the number of licenses to be drastically reduced, if not the current licensing system to be abolished altogether.

The smaller steel producers do not like their role as the powerless underdog and see a number of market developments working against them.

Shandong Iron & Steel Group's proposed acquisition of Rizhao Steel Group is seen as one of those developments.

The larger State-owned Shandong is reported to have suffered a loss of 1.28 billion yuan in the first half of this year, while analysts forecast that the private Rizhao Steel will return a profit of up to 3 billion yuan.

"This is a government-oriented acquisition. We would have been reluctant to be acquired by a State-owned steel mill that is not as profitable as us," said a sales director of a private steel company in Hebei province, who declined to be named.

'Forced love'

"Forced love doesn't last. I know some private steel companies moved their cash before being merged into State-owned ones. Although China is encouraging the consolidation of the steel industry, what we are seeing is less competitive companies acquiring more competitive ones. We should let the market decide the rule," the source said.

Meanwhile, back at the iron ore trading center, Xin Weihua, the general manger of Wanbao, one of the founders who was never out of the media glare in May, is keeping a low profile.

Gao Lei, operation director of the center, however, told China Business Weekly the center is the still waiting for approvals from CISA, and is currently carrying out operational work such as employee training and website construction.

Whatever the role of the center, the issue of iron ore pricing still burns. Whether the CISA accepts a 33 per cent reduction, where this leaves the smaller steel mills without licenses in the future is far from clear.

"There is a lot of pressure on them. Someone who has got a steel mill could be sitting there unless they get iron ore," said Markey of Ernst & Young.

(China Daily 08/10/2009 page1)