Based on the archeological evidence, China first discovered iron ore in 600 BC.
And it keeps on finding more. The People’s Daily reports that an “enormous” 2 billion tonne iron deposit has been found in the city of Benxi. This discovery makes Liaoning the “most iron-rich province in China”, reports the newspaper.
The ore is 900 metres underground and offers fifty years of potential supply to local firms such as Angang Steel.
The news couldn’t have come at a much better time for China’s steelmakers. That’s because they are currently pitted in a who-blinks-first negotiation with the world’s three biggest iron ore miners – BHP Billiton, Rio Tinto and Vale – in a bid to reduce their iron ore costs by as much as 45%. The negotiations, which began last November, have still not concluded. A result was expected at the beginning of last month.
Luo Bingsheng, the vice-chairman of the China Iron and Steel Association says: “There is a consensus that the iron ore market faces a situation of supply exceeding demand, and a significant drop in the price of iron ore should result. However, the two sides have not reached a consensus on the amplitude of the price cut.”
So, who holds the aces? To a certain extent, both sides have a strong hand – which is precisely why the negotiation is proving so tricky.
The miners know that they need Chinese demand – and badly at that.
In the first quarter China bought 80% of the world’s traded iron ore – as orders collapsed in many other markets. “The world’s potential oversupply of iron ores this year is expected to amount to 200 million tonnes,” comments Zou Jian, president of the Metallurgical Mines Association of China.
China also has about 70 million tonnes of iron ore inventory already sitting at its ports – strengthening its negotiating position.
But the miners will be wondering if they should call the Chinese bluff.
China’s steelmakers are still importing ore in record amounts – which dents their bargaining clout. Import tonnage for the first quarter this year was up almost 19% on the year before. And more than 52 million tonnes were imported in March alone, a record for a single month and an increase of 46% on last year.
Other data is persuasive too: Chinese steelmakers increased their production by 1.39% in the first quarter . This may not look that remarkable, but needs to be compared to production cuts of 43% in the EU and 53% in North America.
The latest statistics are leading mining firms such as BHP to question whether China’s economy has bottomed out and is well on the way to recovery.
They will have noted the impact of the $486 billion stimulus package too, as a key driver of spend on steel-intensive infrastructure projects. Some of these projects are slated for later in the year, or are only in the early stages of construction.
A recovering China means more ore demand; and this makes the miners reluctant to concede much at the negotiating table. The steelmakers will be trying to convince them otherwise, especially while demand from other countries continues to erode.
Decision time is looming. Looking at the bigger picture, the Chinese government will be hoping that other finds as large as the field at Benxi will make negotiations a whole lot easier in future.
Keeping Track: Negotiations between China’s steelmakers and the world’s iron ore miners have lasted since November and as reported in WiC14 have hit a wall, with China demanding a 50% price cut. Events took a new turn this week when the South Koreans and Japanese steel industries agreed to a 33% price cut with Rio Tinto, one of the big three miners. China’s response was unequivocal. “These prices do not reflect a mutually beneficial win-win relationship for steelmakers and iron ore suppliers,” stated the China Iron and Steel Association. “We therefore cannot accept these prices and will not follow them.”(5 June 2009)
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