The long-slog iron ore negotiations between China and Australia are stalemated, and Chinese steel makers are now beginning to turn up the heat on some of their other trading partners. Pressure is landing on Indian iron ore companies, who have been favoring the expensive spot trade market to more economical and trustworthy long-term trading contracts.
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Luo Bingshen, vice-chair of the China Iron & Steel Association, said at the 2008 China-India Iron Ore Summit that spot trading was hurting both parties. "Once the tight iron ore supply is relieved," he said, "Chinese steel makers will certainly reduce or cancel iron ore shipments from India."
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"The First to be Abandoned"
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According to China Customs, in December 2007 the average CIF price for iron ore from India was $157.96 per ton, an increase of $90.85 per ton, the highest increase among China’s iron ore imports.
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Wu Jianchang, consultant of China Iron & Steel Association and honorary Chairman of the China Council for the Promotion of International Trade, warned that Indian iron ore producers were walking on the edge.
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"Neither China nor India are willing to see such a situation. Indian ore miners seek an unreasonable increase when the demand of China’s steel industry is growing. When China’s demand for imported iron ore can be maintained or even decreased, Indian iron ore resources will be the first to be abandoned."
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H.C.Daga, senior president of Essel Mining & Industries, admitted that now is a key time for India’s iron ore development, and China and India should reinforce their cooperation.
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Indian taxation policies also affect iron ore exports. In early 2006, India levied an export tariff of $1.22/ton on iron ores with a grade lower than 62%, and $7 /ton on ores over 62%. This tariff is expected to rise in 2008.
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"India’s tariff on exported iron ore has seriously affected the healthy development of China-India iron ore dealing," said Feng Shuijun, deputy general manager of Sinosteel Trading Company, adding that India should discontinue levying the tariff.
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The Indian iron ore market suffers from fragmentation, disorderly competition and a host of irregularly operating companies. Dong Hui, an official in the General Administration of Quality Supervision, Inspection and Quarantine of China says the quality of iron ore from Australia, Brazil and South Africa is relatively stable, but the quality of Indian ore is declining.
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R. Gopala, Secretary of Ministry of Industry and Commerce of India said India was going to formulate new policies to control the quality of iron ores.
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In China’s iron ore market, India has lost competitiveness against Brazil, and its market share is decreasing. In 2005, China imported 68.5261 million tons from India, accounting for 24.9% of its total iron ore imports, next only to Australia. But by 2007, its market share had dropped to 20.72%, and was surpassed by Brazil.
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Wu Jianchang said at the summit that India should discuss with China as soon as possible a new trading model between the two parties, instead of pursuing short-term windfall profits, and should promote the image of Indian iron ore in China.
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"If China and India fail to establish a long-term stable supply relationship, it’s the Indian companies who will be the victims," said Luo Bingsheng.
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Shipping companies benefiting from iron ore deal
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While it takes 40-45 days to ship ore from Brazil to China, it takes only 12-15 days to transport Indian iron ores to Chinese ports. Shorter shipping should help to reduce costs. But according to A.Sondhi, general manager of MMTC of India, a sharp increase in shipping fee of sea freight contract at sight is a major reason for the CIF price hike of iron ores imported from India.Â
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It is estimated that on average it is 2.1 times more expensive to ship from India to China than it is to ship from Australia, and 1.33 times more expensive than shipping from South Africa. Due to shipping fee increases, in 2007 the average CIF price for Indian iron ore is $10.57/ton higher than the average for China’s iron ore imports.
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Shipping companies are the main beneficiaries of the CIF price increase. The FOB price for Indian iron ores has only increased by 3.24%, indicating Indian iron ore suppliers are substantially profiting from the high prices, while Chinese steel makers, of course, are suffering mightily.
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R.K. Sharma, secretary general of Federation of Indian Mineral Industries, thinks the increase in railroad and highway transportation costs for iron ore along with taxation policies released by the Indian government will also seriously threaten the increase in the India’s iron ore supply.
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Sign Long-term Contract
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Now 60% of China’s iron ore imports are under long-term contracts, mainly from Australia, Brazil and South Africa, with relatively fixed shipping fee; and the remaining 40% are under contract at sight, mainly from India. Since the amount can not be predetermined, it can only be transported by sea freight contract at sight.
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Between January 18 and February 18, 2008, China-India iron ore dealing totaled 16.8526 million tons, of which spot trading accounted for 98.77%, or 16.6454 million tons, and long-term contract trading only took up 1.23%, or 207.3 thousand tons.
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Luo Bingsheng suggests the two parties should sign a long-term contract and build up long-term stable supply-demand relationship, and iron ore should be settled according to the FOB price and the open international price decided by the annual negotiation between steel makers and iron ore suppliers.
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R.K.Sharma countered that 60% to 70% of India’s exports to China were provided by small mines and small intermediaries, which were hard to control and set a unified price for.
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Luo warned that if the Indian party had difficulties in organization and coordination, China would gradually reduce the amount and percentage of spot trading and force iron ore dealing into long-term contracting trading.
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