Energy & Resources

Sore about ore

China’s iron and steel association capitulates on pricing

Sore about ore

Hot issue: price of ore

Diligent readers of WiC might be wondering why we haven’t mentioned CISA for several months or its increasingly stuttering efforts to negotiate down the price of imported iron ore. Last year this subject was just about our most heavily reported item.

On one side you had the China Iron and Steel Association (CISA), and on the other the big three ore miners, BHP Billiton, Vale and Rio Tinto. Tensions first became apparent in early 2009, when CISA tried to collectively bargain ore prices down on behalf of the Chinese steelmakers – which, as a group, are the miners’ single biggest customer.

But CISA’s negotiating hand was soon weakened – ironically when China’s very own stimulus package pushed the spot price of ore from the lows the metal saw during the post-Lehman recession. Rather than accept this, CISA obstinately refused to budge from its demand for a 50% price reduction. As negotiations dragged on and CISA flailed, WiC was reminded of a bloodied boxer who’d gone one too many rounds; the miners meanwhile were running rings around their Chinese negotiating counterpart. Every day CISA refused to do a deal, the spot price of ore edged higher.

Then came what looked like the knockout blow. Last April (see WiC56), the miners announced a new pricing mechanism: setting iron ore rates on a quarterly basis using average spot prices. This ended the longstanding practice – previously favoured by China’s steelmakers – of agreeing an annual price for ore each January. The Financial Times said the move was likely to favour the ore producers.

CISA was apoplectic, to say the least. Far from throwing its towel into the ring the association’s secretary general, Shan Shanghua, gave an interview to China Business News announcing he would be back for another round of confrontation.

In fact, CISA declared a boycott of the new quarterly pricing mechanism and ordered Chinese steelmakers not to buy at all from the three iron ore producers – a punchy move given their virtual dependence on BHP, Vale and Rio for the commodity.

Indeed, with only two months of iron ore reserves, cracks were soon appearing in the boycott. CISA admitted that individual steelmakers had began negotiating deals with the three foreign miners.

By the second half of the year, the erstwhile staccato CISA had gone strangely quiet. Local media noted that its role as the steel industry’s exclusive negotiator had been scaled back – and that big steelmakers like Baosteel would get a seat at any future negotiating table beside CISA. CISA’s heavyhanded tactics had proved a failure – in full public view.

So it was a humbled CISA paying a visit last month to miners in Australia. “The quarterly pricing index has been accepted by both sides and CISA is no longer blindly emphasising the need to make changes to it,” commented the Economic Observer of the capitulation.

The Chinese parties (individual mining firms joined CISA on the trip) have scaled back their ambitions, according to the newspaper. They talked instead about the index on which the quarterly prices are set, and they suggested prices to include volatile shipping costs, using a rate known as CIF (cost, insurance and freight). This was an issue, said EO, because the Chinese believe the miners now also exercise too much influence over shipping rates too.

Then again, EO didn’t expect the miners to agree, as CISA’s negotiating position is only getting weaker. In January, China’s iron ore imports surged 48% from a year earlier, according to government data and website reckons that the CIF price of imported iron ore hit $200 a tonne in China last week. To put that in perspective: when CISA’s negotiations began in 2009, the spot price was $58 per tonne. Worse: just as it conceded the quarterly pricing principle, BHP has announced a switch to monthly arrangements – a move that’s likely to irk CISA further.

Keeping Track: In last week’s issue we looked at China’s attempts to gain the upper hand in negotiations with the world’s big three miners (BHP Billiton, Rio Tinto and Vale) over the price of iron ore. As detailed in the article, it has pretty much been a losing battle for the China Iron and Steel Association (CISA). So a different tack: China Daily quotes the organisation’s former vice-chairman as saying the new goal is to buy mines overseas. Last year only 15% of ore imports came from mines owned (or part-owned) by Chinese steelmakers. CISA says the target is to up this to 40% by 2015. He also suggests China uses it forex reserves to buy and store ore. “Like oil reserves, China should also have iron ore reserves,” says Luo Bingsheng. (Feb 25, 2011)

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