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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