China’s the Underdog in ’09 Iron Ore Talks

China’s the Underdog in ’09 Iron Ore Talks

Best of luck to Chinese steelmakers pushing the notion that iron ore prices should be dialed back to 1994 to account for the collapse in their markets.

One should always root for the underdog, after all.

Informal talks have just begun for the 2009 iron ore contract between China’s steel makers — collectively the world’s largest ore consumers — and miners Companhia Vale do Rio Doce, BHP Billiton, and Rio Tinto.

[iron ore importers]

For a mechanism that has a great deal of influence on Asia’s growth, and provides the benchmark around which the price for Korean and Japanese mills will be set — the talks are a remarkably opaque combination of private cajoling and public posturing.

Witness this week’s opening salvo from the Chinese Iron and Steel Association: If steel prices have fallen back to 1994 levels, why shouldn’t the key raw material be cut to the same mark?

That would mark an 80% discount to current terms, a precipitous drop that the big-three iron ore producers could ill afford.

The calculus of the iron ore market in China, however, ensures this isn’t a likely outcome: more than 1,000 steel mills buy 60% of their iron ore from just three companies.

In Iron Ore Talks, China's the Underdog

Associated Press

Baosteel, the industry giant, leads the talks on the Chinese side, but the buyers are far from cohesive in their position.

That’s one of the reasons Beijing is pushing for industry consolidation, and promoting domestic iron ore production.

But the power of the sellers is evident: A year ago, BHP and Rio got better terms — an 85% price hike from the year before — by arguing for a premium since shipping their ore from Australia costs less than shipping Vale’s from Brazil.

Vale itself, dissatisfied with a 71% price increase, returned to China in September to ask for a mid-contract hike. That effort was derailed as the credit crisis worsened.

This kind of leverage is why Chinese firms were so relieved when a mooted BHP-Rio merger didn’t materialize.

As a fresh negotiating round gets under way, China’s steel producers aren’t necessarily counting on winning an 80% cut in prices. The opening offer has to be low — that’s the game — and the Chinese are better-positioned than they were last year.

But make no mistake about who’s really in control of the situation.

Wall Street Journal

Heard on the Street 12/12/08

Chuin-Wei Yap

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