Archive for July 18th, 2009

Saturday, July 18, 2009

China’s Steel Industry: The Grey Area

Experts on China’s large steel and iron ore industry say corrupt practices have gone on for years, including iron ore deals off the books and the exchange of confidential market data that Beijing now considers state secrets.

Analysts and industry officials, many of whom asked not to be identified Monday because they feared upsetting Beijing, said the steel industry was rife with rumors and worries that there could be a wave of arrests and detentions in the coming weeks, just as the industry was beginning to recover from a sharp slowdown.

“There’s a large gray area out there,” one industry official, who asked not to be named, said in a telephone interview on Monday. “We entertain officials all the time. Is that considered a bribe?”

David Barboza in The New York Times, July 13/14, 2009

The Rio Tinto issue comes in the wake of recent complaints by the European Union and the United States with the World Trade Organization, saying Chinese export quotas on some of its raw materials and tariffs violated the agency’s rules. The quotas, benefitting domestic Chinese industries, cover exports of critical items such as bauxite, coke, magnesium, zinc and silicon metal in which China leads world output. Despite declines in its exports due to the global financial crisis, China’s demand for raw materials, energy and other resources shows no signs of abating.

OfficialWire, July 17, 2009

From what I can see, the Chinese authorities have not been able to find any evidence against the Rio Tinto staff now under detention. Rio Tinto’s refusal to back down and the Australian Government’s stepping up of international pressure are creating further complications for the industry regulator China Iron and Steel Association (CISA). If Gordon Chang’s prediction is correct (and he usually is), some members of China’s Politburo Standing Committee are already using the Rio Tinto scandal as a pretence to launch a full scale investigation into the iron and steel industry. China’s top organ of political power has a track record of using charges of high-level corruption to sideline adversaries.

Underthejacaranda, July 18, 2009

Saturday, July 18, 2009

Iron Ore: China’s Negotiations with Foreign Suppliers Unfinished?

JR is trying to make sense of the reports quoted below. No guarantee that he’s getting it all right.

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Along with (initially) four Rio Tinto staff, Tan Yixin, head of iron ore imports for state-owned steelmaker Shougang, was also arrested. He’s reportedly suspected of “revealing China’s negotiating strategy” to Rio Tinto, a source said on July 10, according to The Scotsman. Also currently, China Iron and Steel Association (CISA, 中国钢铁工业协会) and the Ministry of Commerce were investigating whether importers were making speculative purchases, reports Reuters, quoting sources who are familiar with the situation. 112 Chinese steelmakers and trading houses are currently licensed to import iron ore, according to the same report. China has been the world’s biggest steel producer since 1996. Steel importers in China have been blamed in the past to make “greasy profits” from reselling the imports at higher prices to smaller steel mills without access of their own to the international supply market. According to Singapore’s Lianhe Zaobao, this [the size of its steel industry] hasn’t put China into a position to determine the prices for iron ore. The negotiating records of China’s Iron and Steel Group (钢铁集团) which seems to have represented the Chinese side in negotiations with foreign mines had therefore come under criticism. Apparently, it is now Baoshan Iron and Steel‘s (宝钢) turn to negotiate alongside with or on behalf of CISA.

As is usual practise with commodities, Chinese importers may choose between spot market prices which are difficult to forecast, or annual contracts which make for better production cost planning. Some analysts quoted by Reuters in June said that China was faster to switch from annual contracts to spot-market prices once the latter became cheaper than those the contracts were based on. Reportedly, miners rewarded Japan and Korea for honouring commitments they made last year to buy contracted ore at the annual price. China had been riled by Rio Tinto’s settlement with Japanese and South Korean steel makers, which agreed a smaller 33 percent cut for iron ore fines, China’s product of choice, and a much bigger cut of 45 percent for iron ore lump, the product Japanese and South Korea mills favour. Chinese steel producers had originally aimed at a price reduction of 40% in the current round of negotiations with foreign suppliers, but may now settle for a 33% reduction. However, an unnamed source said that the negotiations were still going on, according to Caijing on July 15. Rio Tinto’s representative in Beijing told Caijing that he had received no information about a deal reached between his company and the Chinese steel producers.

Originally, an analyst with Guotai and Junan Securities had expected the price negotiations to be concluded by the end of June.

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