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China 'facing huge iron ore benchmark hike'

Beijing, March 7, 2010

Chinese steel mills are facing massive difficulties during this year's annual iron ore benchmark talks with big price hikes set to push many of them into the red, the head of China's third biggest steel firm, Wuhan Iron & Steel Group, said on Sunday.

Deng Qilin, who also chairs the China Iron & Steel Association (CISA), said the steel mills -- 61 percent dependent on foreign supplies in 2009 -- had little choice but to accept the price increases being forced on them by Rio Tinto and BHP Billiton of Australia and Brazil's Vale.   

"This is a sellers' market so the miners will decide the price increase in the end, but China needs to tell them they cannot raise prices indiscriminately," he told reporters at a briefing held on the sidelines of China's annual parliament session.

CISA said at the end of last year that the miners were likely to ask for a price increase of 20 percent in 2010, but even the most conservative analysts are now expecting a hike of at least 40 to 50 percent.

Deng complained that the big miners had responded to the steady recovery in the global steel market with unfair price demands.   

"If we can accept the costs we can come up with an agreement, but if we are making losses, how can we agree? If we are earning nothing, how can we accept it?    

"While our iron ore mines are 100 metres deep, they only have to dig about a metre underground and extract the ore and they can then sell it at $100," he said.

He said slashing output was not an option for Chinese mills, so the only thing they could do was raise their prices in order to cover their higher costs, but that would require government approval and could have an severe impact on downstream industries and derail the country's economic recovery.
   
Benchmark talks between China and the mining giants ended in acrimonious stalemate last year, with CISA unable to persuade the companies to offer anything more than a 33 percent cut in prices despite a global steel market collapse. The negotiations are this year being led by Shanghai's Baosteel.
   
Wuhan Iron and Steel aims to end its dependence on the three mining giants by making overseas acquisitions, and Deng said that within three to five years the company would effectively be self-sufficient.

"It is a necessity that we solve our resource problem -- we must achieve it," he said.

Asked whether the company's acquisition strategy would allow Wuhan Iron and Steel to circumvent the fraught and frustrating benchmark pricing mechanism within five years, Deng agreed, adding that he "hoped that all companies will go abroad to buy equity stakes in miners and guarantee supplies."    

Wuhan Iron and Steel bought a 21.52 stake in Brazilian miner MMX late last year in a deal that also included a 20-year iron ore supply contract set at an acceptable "China price".

It is also planning acquisitions in Australia, Chile and Venezuela.  -Reuters




Tags: China | iron ore | benchmark |

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