The reason for the rejection is that the "starting price" neither objectively reflects the change of the supply and demand situation in the international iron ore market this year nor symbolizes the win-win relationship between iron and steel enterprises and mineral enterprises, which will lead to overall losses of domestic iron and steel manufacturing enterprises.
Mining companies have observed rebounding steel prices, rising inventories in ports, and the subsequent rise of sea freight. All these seem to be indicators as to whether the negotiation between mining companies and the Chinese side would continue. Some executives even disclose: If China does not agree with the "starting price" set by its Asian counterparts, they prefer to deal in the spot market.
Then, does China own the trump card in the negotiation?
Those Chinese iron and steel enterprises with huge losses are powerless to do anything in the face of the high profits of mining enterprises. Since 2003, with the surge of China's iron ore imports, iron ore prices have been on the rise. In December 2007, CIF of imported iron ore increased from the original $24-28 / ton to a maximum of more than $190 / ton.
Now, Rio Tinto, which has just received the "starting price" of the long-term agreement this year, is digging minerals in the Pilbara mining area at about $42 / ton, but sells the ore powder at $62 / ton. If its largest client, China's steel enterprises, accepts this price, Rio Tinto will breathe a sigh of relief because of the substantial operating margin this fiscal year since it was in a dire situation in the second half of last year.
Let us look at exchange rate changes of the Australian dollar against the US dollar from last year to this year. Although this year’s drop is the first time that ore prices have fallen over the previous seven years, the loss of the mining companies is not beyond imagination. Since last year, the Australian currency against the US dollar depreciated drastically, with the minimum devaluation of more than 30%, and the depreciation is more than 20% now. If the price of exported Australian iron ore with US dollar-denominated drops by 33 %, the actual falling price is only 13% for Australia's mining enterprises since its final settlement is the Australian dollar.
As for the iron and steel enterprises in China, even though they now purchase at the spot price slightly lower than the "starting price," they are still struggling and on the brink of losing money. If the spot price increases pushed up by the "starting price" and the domestic steel market remain sluggish, the loss of China's steel enterprises is likely to increase further.
Therefore, the Chinese side is to bet whether the steel market is likely to pick up in the second half of the year. It not only determines whether the loss of the entire industry can be used as a bargaining chip, but also decides whether purchasing price in the spot market will be higher than the long-term price if the talks fail.
At present, domestic steel prices have been rising for seven weeks, and in accordance with historical trends, April and May are generally the peak season. Therefore, whether the price will continue to rise in June and July is the key in the negotiation. In addition, China's imports of iron ore inventories are large, which can also reduce the import in negotiations.
At present, China's iron ore port stocks total 70 million tons, and the stocks add up to more than 100 million tons together with stocks in factories and markets. The monthly domestic production volume is 60 million tons of iron ore and based on the 50% external dependency ratio, China needs to import 30 million tons of iron ore per month. With the 100 million tons of stocks, it can maintain production for about three months without import.
However, after Japan won the "starting price," imported iron ore in the domestic spot market is still increasing, and prices are continuing to climb and approach the "starting price," which has a striking contrast with the true demand, for China's iron ore traders, large-scale state-owned enterprises, private enterprises of small and medium-sized are not consistent in the judgment on the market and the negotiation position.
Although the registration and recording system for iron ore import has been implemented, speculation by some traders and even some iron enterprises cannot be stopped. They estimate the increase of iron ore and further increase the import of spot minerals following the example of the 35% decline of Nippon Steel.
Different from the long-term contracts that Japan's iron and steel enterprises observe, the strong purchasing power in the Chinese spot market and the lack of implementation of the long-term contracts eliminates the worry of foreign mining enterprises about the risk in the spot market, even if they are unable to obtain the same reduction as Japanese companies.
To achieve the desired results, all of the iron ore importers should be united to control the order in the spot market, which is not only an expedient measure to get the "Chinese price," but also a long-term issue that must be addressed for China’s passive position of importing raw materials.
Â
Â