As major iron producers continue pushing for a switch to short-term iron ore contracts, Chinese steelmakers remain firm in their opposition to the practice, saying the long-standing tradition of annual contracts brings stability to the industry.
BHP Billiton announced on March 30 that it had agreed with a significant number of Asian customers to shift the annual pricing mechanism to short-term contracts based on market prices. Vale, another iron ore giant, also expressed its desire for a quarterly pricing system at the China Iron Ore Conference 2010 on March 30.
According to Luo Bingsheng, vice president of China Iron and Steel Association, Chinese steelmakers have not yet accepted the short-term pricing mechanism. At the same time, Jia Yinsong, inspector from the Ministry of Industry and Information Technology's Raw Material Division, also said, "We will certainly support long-term prices."
Chinese steelmakers still adamantly against short-term prices
BHP Billiton claimed in a public notice that the majority of its iron ore is now sold at short-term prices, which are based on the CIF prices - short for cost, insurance and freight. This conforms to BHP Billiton's attitude toward market prices, representatives from the organization said.
BHP Billiton also refused to accept Free-on-board (FOB) prices - whereby shipping to a specified place is paid at the seller's expense - in favor of CIF prices. This indicates that steelmakers will not only lose opportunities to purchase raw materials at steady prices, but also lose their power to determine the ocean freight prices. In the past, Chinese mills could reduce transportation costs by signing long-term ocean freight contracts, but now they will face the negative effect of surging prices for both iron ore and ocean freight.
"We will adhere to the long-term pricing system"
In response to BHP Billiton's statements, Jia told reporters at the China Iron Ore Conference 2010 on March 30, "We will certainly adhere to the long-term pricing mechanism." Jia also quoted a Financial Times report about the opposition of European mills to the end of a long-term pricing mechanism.
Jia explained that the iron ore sector relies on transparency and stability. Spot prices for iron ore will cause three risks: an operational risk for companies, a risk for the industry as a whole and a credit risk. Both providers and suppliers should strive to realize a win-win situation, promote the development of the iron ore sector and balance current and future interests.
Jia said he is concerned about the high inventories of Chinese iron and steel producers. He said that statistics show that the average profit margin for member enterprises of the China Iron and Steel Association was only 2.2 percent in 2009. The inventories of China's iron and steel industries were as high as 30 million tons at the end of 2009, and the figure at the end of February 2010 was 32 percent higher than that of the previous year. The inventory growth rate has, by far, outpaced market demand.
Impact of higher ore price to be felt throughout entire economy
Li Xin, head of the China Metallurgical Industrial Planning and Research Institute, told People's Daily that high iron ore prices brought on by short-term agreements will have a considerable impact on domestic iron and steel producers by drastically pushing up costs.
Newest data shows that the fine ore price offered by Indian suppliers has already risen to 160 U.S. dollars per ton. If the iron ore prices under the 2010 long-term agreement double compared with those seen under the 2009 agreement between Japanese steelmakers and the big three iron suppliers, the cost for iron ore at a grade of 62.5 percent will be up by 650 yuan per ton, excluding ocean freight. This will be a considerable increase to the costs of the entire industry, pushing profits into the red once again.
If iron ore prices drive up the cost of steel, iron and steel producers will transfer the higher costs to downstream industries, pushing up raw material costs for the entire manufacturing and infrastructure construction industries. In turn, the market prices for automobiles, consumer electronics, home appliances and other downstream industries will also rise. This will not only further undermine domestic consumption, but will also affect the stability of the steel market.
Li said he believes that in the long term, it is hard to judge which side will benefit from the short-term agreements, but Chinese steelmakers must break the stranglehold that the three largest iron-producers have on the industry. Chinese steel producers must go abroad, he said.
"If Chinese steel producers can control over 300 million tons of annual iron ore output abroad, the trend will be reversed," Li said.'
By People's Daily Online