At 9pm on April 6, 1893 Andy Bowen and Jack Burke started what would be the longest fight in history. Their boxing match would last 110 rounds. At 4am both pugilists were judged too exhausted to continue, and the fight was deemed a draw.
The dispute between China’s steel association (CISA) and the world’s big three iron ore miners is starting to take on shades of the Bowen-Burke bout.
The two parties have been slugging it out for more than a year and a half. And in spite of the miners throwing what looked like a knock- out blow a fortnight ago, a defiant CISA still refuses to be counted out of the fight.
As reported in WiC55, the miners – BHP Billiton, Rio Tinto and Vale – gained the initiative with the announcement of a new pricing mechanism setting iron ore rates on a quarterly basis using average spot prices. This ended the longstanding practice – previously favoured by CISA – of agreeing an annual price for ore. The Financial Times called the move “historic”, as well as very favourable to the miners.
If CISA was meant to admit defeat at this point, think again. Instead, the association’s secretary general, Shan Shanghua, gave an interview to China Business News announcing he would be coming out of his corner aggressively for another round.
CISA – which negotiates on behalf of all China’s steelmakers – has declared a boycott of the new quarterly pricing mechanism. Accordingly, it has ordered Chinese steelmakers not to buy at all from the three iron ore producers – a punchy move given that they normally purchase 450 million tonnes a year from them.
Instead CISA wants the nation to buy from alternative sources, as well as fall back on its 90 million tonnes of iron ore reserves. Industry experts reckon the country’s steelmakers can get by in this manner for two months. CISA hopes that will be time enough to put pressure on the big three producers to abandon the new pricing mechanism.
Australian website Miningnews.net doesn’t think that’s likely. In fact, in an article entitled “China spits the iron ore dummy” Minelife analyst Gary Wendt doubts that the Chinese have any chance of success whatsover. Wendt offers a few Aussie hometruths too, accusing CISA of “childish behaviour” and “obstinance” in the price negotiations.
Stock Analysis senior resources analyst Peter Strachan agrees: “They are just stamping their feet, which is really adolescent behaviour and shows that they are not mature players in the overall resources market. It is not really the smart way to treat your main suppliers.”
With the spot price for iron ore hovering around $160, a little stroppiness is understandable. Wuhan Iron and Steel – the third biggest producer – has raised prices but says it cannot keep pace with the surging ore costs. For example, it claims that it now costs Rmb3,820 to make a tonne of hot rolled steel; but that it can only be sold for Rmb3,800. Its chairman, Deng Qilin told New Century Weekly: “The more we produce, the more we lose. Our current financial status is fragile.”
The government believes a key response is to force consolidation among China’s 1,000 or so steel firms. So it has announced that any steel mill smaller than 400 cubic metres must close by the end of next year. The hope is to create five steel giants to offset some of the power of the large miners.
Another longer term ploy also became evident earlier this month when China Railway Materials announced it was buying 12.5% of African Minerals. If Chinese firms can finance new iron ore production in Africa and Russia, CISA thinks it can pack more of a punch with BHP, Rio and Vale. So even if it doesn’t go 110 rounds, this fight may still have a way to go…
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