Iron ore price rise could force China steel rationalization
Updated: 2008-02-26 18:38
In 2006, China was the world's first major steel producer to settle with three mining firms -- Vale, Rio Tinto and BHP Billiton -- agreeing to a relatively modest hike of 9.5 percent for the year starting April 2007. That was the smallest price rise in the years since China joined the world price negotiations.
This time around, however, Chinese steel makers lost the opportunity to set the benchmark. Japanese steel makers reportedly rushed to wrap up the talks before the Chinese, according to media reports.
"The situation is tougher, as spot prices soared to a record high in 2007," said Hu Kai, a senior analyst with the Chinese Umetal.com website.
Hu said that the gap between term prices and spot prices of iron ore in 2006 wasn't as wide as in 2007, resulting in a relatively modest price hike. Steel makers were satisfied with the outcome, although iron ore producers considered it unfair.
Soaring spot prices in 2007 changed the equation and pushed up the term prices for 2008.
With demand for iron ore soaring, global miners' production has surged. Vale boosted its 2007 iron ore production by 12 percent, for example, and Rio Tinto turned out 9 percent more ore.
Steel makers' profits also set a record high in 2007, increasing by 30 percent year-on-year, and mining companies wanted to share the wealth.
Baosteel faced a challenge
Baosteel, the partly state-owned representative of China's steel makers in the pricing negotiations, faced a challenge. The miners were holding out for higher prices, while other major Chinese steel producers wanted a favorable pact. Given the huge share of the market that China represents, Baosteel may have believed it had more bargaining power than it did. CISA estimated the 2008 price rise at only 20 percent.
So Baosteel waited -- but others negotiated.
"Even if Baosteel had concluded negotiations first, the price hike would not be lower," said Hu.
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