The 2009 iron ore price agreement between Australian miner Rio Tinto and Japan's Nippon Steel Corporation, with its deep price cuts for iron ore, is not sitting well with Chinese steelmakers, who are looking for even deeper cuts. Market and economic factors, however, may make further reductions hard to achieve.
Rio and Nippon finally agreed to cuts of 32.95% for powder ore and 44.46% for lump ore, still less than the 40% to 45% price cuts demanded by the China Iron & Steel Association (CISA).
Chinese steelmakers are continuing in negotiations with their suppliers, looking for a better price. In 2008, Rio Tinto and BHP Billiton, refusing to follow the first contract price reached between Japanese steelmakers and Brazilian miner Vale, gained a higher price increase after three extra months�negotiation.
CISA, negotiating on behalf of Chinese steelmakers, says it requires deeper cuts to reflect the increased importance of the market for iron ore in China relative to Japan, Korea, and Europe, where demand has is fallen off more drastically than in China. Chinese producers have approximately 110 million tons of iron ore on hand, equivalent to two months worth of production inventory,, giving them some leverage in the talks.Â
However, steady signs of economic rebound in China are doing no good to CISA's negotiation stance. Long-term prices are largely based onestimates of market trends for the following year. Since Japanese steelmakers have accepted a price, they believe they will not all suffer losses under it. Compared with other markets, it appears that China will rebound more quickly and may be able to bear higher prices.
There is at least one other negative factor for Chinese steelmakers in the negotiation. Rizhao, China's largest port for iron ore imports, has founded an iron ore trading center that it aims to develop into thelargest electronic trading center in the world. In connection with this, it has set up the Rizhao Index as a means of tracking the world's iron ore trade. The trade center will mainly conduct spot trades and is not open to mid- or long-term transactions at present. In this, its first year of operations, the center plans on a total trade volume of over 100 billion yuan , with future annual volume to exceed 200 billion yuan.Â
CISA has long emphasized that its members will deal in long-term contract pricing only, and that it will not trade on the the spot market. This is consistent with CISA’s long-time policy of resisting pricing mechanisms based on an iron ore index, setting it at odds with the establishment of the iron ore trade center in Rizhao.
POSCO, Korea's largest steel company, also confirms that its negotiation with its three major iron ore suppliers have not been concluded. Earlier POSCO Vice President Kwon Young-tae claimed the company required a 50% price cut. In previous years, POSCO always teamed up with Nippon Steel Corporation in negotiations and followed the contract price reached between Nippon and iron ore miners. But POSCO's situation has changed as Korea's currency, the won, has depreciated more drastically than the yen, exposing POSCO's operations to significant currency risk if it is forced to accept the current price.
Japan's steel demand is declining more seriously than China's, but Japanese steel makers are still acquiring a great deal of global mining resources, explaining their acceptance of a higher price last year and lower price this year. Currently, only 13% of the iron ore imported into China are from overseas mining companies in which China has a stake, while for Japan this number stands at 60%. This allows Japanese steel makers to receive large dividends from overseas mining companies whether the price of iron ore is high or low.