Though negotiations between Baosteel, on behalf of Chinese steel makers, and Australian iron ore suppliers BHP Billiton and Rio Tinto are stalemated, Chinese market analysts predict that prices have reached a periodic peak. An iron ore trading decline and the caution of Chinese steel markers expecting a price drop later in the year may provide leverage for Baosteel during the negotiations.

Iron Ore Price Sees First Decrease

While the haggling goes on, for the first time, the CIF (cost+insurance+freight) price for China’s spot iron ore imports saw a decrease. In January the CIF price was $127 per ton, in February $129 per ton, from which it fell in March by $4. "This is mainly due to steel makers who have suspended iron ore imports due to the painfully high price. During the first quarter of this year, supply overtook demand by 10 million tons. If this trend continues another month, it will benefit the ongoing negotiation," said Zou Jian, chairman of Metallurgical Mines Association of China.

In 2007 China imported 380 million tons of iron ore. Although that was an increase over 2006, the growth rate has slowed for three straight years. The 2007 growth was 23% below 2004’s.

The large price hike decided by a new supply contract between Brazilian mega-miner CVRD and a group of Asian steel-makers at the end of February did lift the iron ore price, but in early March, it fell back a bit.

Although the three international mineral giants, BHP, Rio and CVRD, still dominate the iron ore market, several domestic iron ore mines, each with expected output of tens of millions of tons, will help China reduce iron ore imports once they are put into production.

Zou Jian says the steel price will increase in the first half of this year, but during the second half it may decline and the annual average price in 2008 will be lower than that of 2007. He thinks in 2008 the iron ore price will fall from 1200 yuan-1500 yuan per ton to 900 yuan-1000 yuan per ton.

Other analysts are saying that as the current high prices for raw materials such as iron ore and coke are seriously affecting steel company profit margins, prices are unlikely to increase much before the steel price hike has been fully accepted by downstream firms. Prices may hover around the current highs or perhaps fall back. In this time, the combination of steel companies�unwillingness to purchase iron ore price at such high prices coupled with a shortage of funds may encourage small and medium-sized dealers to jump into the market with ore at a more attractive price.

Flexible Negotiation

In their negotiations with Baosteel, BHP and Rio have declared that the price increase should be consistent with the 71% CVRD achieved. They are also asking Asian steel makers to compensate for extra shipping fees. But Chinese steel markers, faced with falling margins and a very possible fall in prices in the second half of the year, are resisting.

According to convention, the two Australian companies will continue to sell iron ore to Chinese steel makers for the price of fiscal year 2007. If the two parties fail to reach agreement by July, the negotiation mechanism that has lasted for many years will be broken and China gets its ore on the spot market. If that happens, steel mill losses could total $1.17 billion, calculated by last year’s imports from Australian companies. China’s downstream enterprises will be extra victims.

Chen Xianwen, an expert from the China Iron and Steel Association, suggests the Chinese party should maintain the long-term pricing mechanism, and try to reach the agreement with Australian companies as soon as possible by being more flexible. Zou Jian says the quality of Australian ore does not match Brazil’s, so the 71% price increase is not reasonable; but as the long-term shipping price from Brazil to China is $20-$30 per ton, while that from Australia to China is only $11 per ton, it may be reasonable to require the Australian suppliers to make up the difference in the long-term price during the new year.

Imported Iron Ore Stock Reaches 58 Million Tons

Gao Wei, general manager of Minerals Department of China National Minerals Co., Ltd yesterday revealed that since the beginning of March this year, the iron ore market has weakened and the tonnage traded has decreased. By the end of March, although the price had fallen slightly, trading had not picked up.

And stimulated by prospects of a sharp long-term supply price hike, more domestic iron ore mines are being exploited, which will help to reduce the demand for iron ore imports. China is expected to import about 410 million tons of iron ore this year, an increase by 7% over 2007.

Gao Wei predicts that since the iron ore price had reached a record high, and the raw material costs for steel makers have increased sharply, multi-batch and small amount might be this year’s strategy of Chinese steel makers facing uncertainties over iron ore prices.

Now it is commonly estimated China’s crude steel output this year will be about 520 million tons, and the growth rate will be 10 percentage points lower than it in 2007.