The price talks between the world's biggest iron ore miners and Chinese steel makers seem to be at an impasse. China is sticking firm to a price cut of more than 40 percent in the annual contracts. But Japanese and South Korean mills have agreed with Rio Tinto on a 33 percent slash in iron ore prices. What has led China to this stalemate?
Against the backdrop of the bleak global steel market, China's imports of iron ore have continued to soar. In the first five months of this year, China imported over 200-million tons of iron ore. The country's iron ore stockpile even topped 100-million tons. That's triple the standard stockpile volume.
Given the booming demand by China, Australian miners are understandably resistant to a price cut. But why is China able to maintain such huge demand even amid the market slump?
Luo Bingsheng, Executive Vice Chairman of China Iron & Steel Association said "The main reason is that while large and medium sized steel makers are reducing output, smaller firms are increasing production significantly."
The question then becomes, why have small steel makers increased production?
The fact is, China's large steel makers mainly produce high quality steel products. But the major demand in the market now is for construction steel, which has low technical requirements. This is precisely what small and medium-sized steel companies make.
In addition, smaller steel makers mainly purchase iron ore on the spot market at about 80 US dollars per ton. While the price large companies's pay is fixed at 100 US dollars based on price talks in 2008. This makes it reasonable for smaller competitors to increase output in order to gain market share.
The China Iron and Steel Association also says these are only some of reasons for the increase in the nation's iron ore imports.
Shan Shanghua, Secretary General of China Iron & Steel Association said "Another reason lies in domestic iron ore traders. Since the beginning of this year, domestic traders increased imports by 20 percent from a year earlier. That's about 39 million tons. This has run far away from the standards."
The secretary general also says the mounting stockpile is aimed at widening profit margins, as many traders are expecting further price hikes in iron ore.
The association says it's precisely such disorder in China's iron ore imports that have hindered the association's influence during the price talks.
(CCTV July 2, 2009)
