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China steel makers, iron ore suppliers avoid price talks

(Xinhua)
Updated: 2009-04-23 16:50

This year's negotiations between China's steel companies and iron ore miners on a benchmark price for the material could last until mid-year, which would be a record, analysts have told Xinhua.

The benchmark price for China is significant for the overall situation of the iron ore miners, as China's demand for iron ore in 2008 was 444 million tons, more than half of the world's total.

Iron ore and steel companies usually agree on the year's long-term contract prices by April 1, the start of a financial year. However, steelmakers and miners are deadlocked this time around.

Related readings:  China steel makers report $484 million loss in Q1  Steelmakers feel the price pinch  Steel prices ease on slow inventory rundown  China spot prices fall again on inventory build-up

In 2008, the two sides did not agree on long-term commercial contract prices until June but "this year, it will probably be even later," an analyst at Umetal, Hu Kai, said.

Iron ore companies believe China's 4-trillion-yuan ($586 billion) stimulus package and the new steel futures contracts that began trading in March might help spur steel demand, Hu said.

"However, steel companies believe that the global economy is still in contraction, and steel supply still outweighs demand," Hu said.

The usual practice is that until each new year's benchmark iron ore price is settled, steel companies continue to pay the previous year's contract price and get refunds if the final contract price is lower.

But "if Chinese steel companies bought iron ore at the 2008 benchmark prices, we wouldn't be able to survive," Wuhan Iron and Steel (Group) Corp general manager Deng Qilin said.

In the second half of 2008, steel prices fell 30 percent to 37 percent. The industry began cutting output amid weak demand, and so the need for iron ore diminished.

"Iron ore supply increased 30 to 40 percent [last year] as production capacity rose. Meanwhile, global demand for steel declined," China Iron and Steel Association secretary-general Shan Shanghua said.

He said ore miners should only ask for 60 percent of last year's benchmark price before striking a new deal.

On April 20, Brazil-based iron ore supplier Vale announced that "80 percent of the sales (should be paid for) in cash and the remaining 20 percent would be received at a later date" when the 2009 benchmark price settlement was concluded.

Hu said that actually, Vale, Rio Tinto and BHP Billiton -- three major suppliers -- had been giving a similar discounted price since early April.

Another Umetal analyst, Du Wei, said the 80 percent "discounted price" reflected that Vale would not easily accept China's demand for a 40 percent price cut.

"The current iron ore price is only 60 percent of the long-term contract price ... when iron ore prices were higher than long-term contract prices, iron ore miners ensured supply according to their contracts with steel companies. Now, it might be time to support the miners," Du said.

"The most important thing for the three iron ore miners is to maintain their market share with Chinese steel companies," he said.