Energy & Resources

Call my bluff

Cracks appear in China’s iron ore boycott

The ore price is smokin’

Officials from China’s Iron and Steel Association – CISA – must have read the findings of the Henry Report with a deep sense of schadenfreude. For while China won’t be a direct beneficiary of the increased taxes that the Australian government plans to levy on BHP Billiton and Rio Tinto, it will at least be pleased to see the two mining giants take a beating from someone – even if it has to be mild-mannered Australian leader Kevin Rudd.
Relations between CISA and the two miners have been fraught for over 18 months, a situation that has been chronicled extensively by WiC. CISA has been increasingly embittered by the manner in which the miners have seemed to outmanoeuvre it at will.
As reported in WiC56, the final straw came with BHP’s announcement of a new quarterly, market-based pricing mechanism – to replace the annual contracts that the industry had used for decades. CISA was not amused and announced it would order Chinese steelmakers to boycott ore imports from BHP, Rio and Vale (the other big miner). Instead the country – the world’s biggest iron ore consumer – would rely on its strategic reserve and domestic supplies to get by. It was estimated that autarky could function for at least two months.
To industry analysts this always seemed an implausible strategy, born more of frustration than rational planning. Stock Analysis senior resources analyst Peter Strachan told Miningnews.net: “CISA are just stamping their feet, which is really adolescent behaviour and shows that they are not mature players in the overall resources market.”
But over the past week, CISA has turned up the volume again. It told Bloomberg that the world’s top three iron ore producers were asking for price rises of between 90-100% and had adopted “a threatening policy”. The association’s deputy chairman, Luo Bingsheng told the US news agency: “If you don’t accept  iron ore prices before a deadline, they threaten to cut supplies. Is this iron ore negotiations?”
Colourful rhetoric aside, Luo acknowledged that his negotiating position was cracking, admitting that Chinese steel mills were reaching individual deals with the big three miners – to buy at $110 a tonne – terming it a “private matter, individually negotiated”. As Dow Jones points out: “Luo’s acknowledgement underscores the weakness of the government’s official resistance to pricing demands by a united mining industry, as private deals such as these all but erase China’s clout at the negotiating table.”
It hasn’t helped CISA’s cause that China’s output of crude steel surged 24.5% in the first quarter, while production in the rest of the world grew an even greater 33%. As even Luo admits, supply of ore is falling short of demand.
But that doesn’t stop him being irked by what he says is the miners’ attempt to maximise short term profits at the expense of Chinese steelmakers, whose margins have collapsed. “They abandon the principles of a win-win situation for suppliers and buyers,” Luo laments.
He also says China must wean itself off a reliance on the big three and increase domestic iron ore supplies – which he told the China Daily had risen 21% in the first quarter (over a year before) to 204 million tonnes.
Buying abroad is the other key strategy. The South China Morning Post reports that Sichuan Hanlong has suddenly become a player – thanks to financing from the China Development Bank and Export-Import Bank of China. It has just bought a 55% stake in a molybdenum mine, a key ingredient for hardening steel. The Hong Kong-based newspaper adds that Hanlong plans to invest $5 billion in other Australian mines to become “a fourth force” in the country’s iron ore sector, to rival BHP, Rio and Fortescue. That’s still a way off. Meanwhile, expect more fireworks from CISA when the next contract is set next month for the July-September quarter.

Officials from China’s Iron and Steel Association – CISA – must have read the findings of the Henry Report with a deep sense of schadenfreude. For while China won’t be a direct beneficiary of the increased taxes that the Australian government plans to levy on BHP Billiton and Rio Tinto, it will at least be pleased to see the two mining giants take a beating from someone – even if it has to be mild-mannered Australian leader Kevin Rudd.

Relations between CISA and the two miners have been fraught for over 18 months, a situation that has been chronicled extensively by WiC. CISA has been increasingly embittered by the manner in which the miners have seemed to outmanoeuvre it at will.

As reported in WiC56, the final straw came with BHP’s announcement of a new quarterly, market-based pricing mechanism – to replace the annual contracts that the industry had used for decades. CISA was not amused and announced it would order Chinese steelmakers to boycott ore imports from BHP, Rio and Vale (the other big miner). Instead the country – the world’s biggest iron ore consumer – would rely on its strategic reserve and domestic supplies to get by. It was estimated that autarky could function for at least two months.

To industry analysts this always seemed an implausible strategy, born more of frustration than rational planning. Stock Analysis senior resources analyst Peter Strachan told Miningnews.net: “CISA are just stamping their feet, which is really adolescent behaviour and shows that they are not mature players in the overall resources market.”

But over the past week, CISA has turned up the volume again. It told Bloomberg that the world’s top three iron ore producers were asking for price rises of between 90-100% and had adopted “a threatening policy”. The association’s deputy chairman, Luo Bingsheng told the US news agency: “If you don’t accept iron ore prices before a deadline, they threaten to cut supplies. Is this iron ore negotiations?”

Colourful rhetoric aside, Luo acknowledged that his negotiating position was cracking, admitting that Chinese steel mills were reaching individual deals with the big three miners – to buy at $110 a tonne – terming it a “private matter, individually negotiated”. As Dow Jones points out: “Luo’s acknowledgement underscores the weakness of the government’s official resistance to pricing demands by a united mining industry, as private deals such as these all but erase China’s clout at the negotiating table.”

It hasn’t helped CISA’s cause that China’s output of crude steel surged 24.5% in the first quarter, while production in the rest of the world grew an even greater 33%. As even Luo admits, supply of ore is falling short of demand.

But that doesn’t stop him being irked by what he says is the miners’ attempt to maximise short term profits at the expense of Chinese steelmakers, whose margins have collapsed. “They abandon the principles of a win-win situation for suppliers and buyers,” Luo laments.

He also says China must wean itself off a reliance on the big three and increase domestic iron ore supplies – which he told the China Daily had risen 21% in the first quarter (over a year before) to 204 million tonnes.

Buying abroad is the other key strategy. The South China Morning Post reports that Sichuan Hanlong has suddenly become a player – thanks to financing from the China Development Bank and Export-Import Bank of China. It has just bought a 55% stake in a molybdenum mine, a key ingredient for hardening steel. The Hong Kong-based newspaper adds that Hanlong plans to invest $5 billion in other Australian mines to become “a fourth force” in the country’s iron ore sector, to rival BHP, Rio and Fortescue. That’s still a way off. Meanwhile, expect more fireworks from CISA when the next contract is set next month for the July-September quarter.


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