China steel mills say suppliers encourage speculation

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August 04, 2009

China steel mills say suppliers encourage speculation

China's steelmakers, stalled in iron-ore price talks with Rio Tinto and BHP Billiton, said producers of the steelmaking material are encouraging speculative trading, and wants to control the role of importers.

Iron-ore producers encourage "speculative actions" by increasing sales on the spot market, leading to huge stockpiles, the China Iron & Steel Association said in a statement issued in Beijing today. The group, which didn't name the suppliers, called on the government to limit resale profits made by trading companies and stop the sale of ore to obsolete mills.

"We object to speculative and manipulative actions," Luo Bingsheng, vice-chairman of the association, said at a press conference, answering questions related to the ongoing price talks with Rio Tinto and BHPB.

China’s iron ore imports surged 29% in the first half, hurting the steel group’s attempt to negotiate a price cut bigger than the 33% offered by Rio, BHPB and Vale SA. Police in Shanghai detained four Rio executives this month in a probe that Australia said is related to iron-ore price talks.

"Iron-ore suppliers have distorted the actual supply and demand balance in China," the association said in a statement. "This has severely disrupted talks."

Talks between the steel association and iron-ore producers on contract prices are continuing, and China seeks a "win-win"
solution for both sides, Mr Luo said, without elaborating.

Gervase Greene, a Perth-based spokesman for Rio's iron-ore unit, declined to comment. BHPB spokeswoman Samantha Evans wasn't available when contacted at her Melbourne office today.

BHPB, the world's largest mining company, this week agreed to sell 30% of its iron ore under new pricing mechanisms, signalling a break with the 40-year-old tradition of settling annual contracts in Asia.

The ore will be sold through a mix of cash, quarterly and indexed pricing, BHPB said. About 23% will be sold under fixed-price contracts at 33% less than last year's price and talks for the remaining 47% of volumes are continuing, it said.

Under an import system proposed by China's steel group, traders would buy ore at contract prices agreed to between steelmakers and iron-ore producers, Mr Luo said. These traders would take a 3-5% fee. The group would record the amount of ore purchased by mills and the price paid, he said.

That echoed his remarks yesterday that China should seek a unified price for imports of iron ore. Steelmakers in Japan, South Korea and Europe have a similar import and pricing system, he said, without elaborating.

Mr Luo is making the comments as cash market prices in China surged above contract prices offered by Rio, BHPB and Vale, the world's three largest suppliers. Steel output in China jumped to a record in the first half as the government spends Yu4 trillion (US$586 billion) to revive economic growth.

"China's steel capacity has almost exploded," said Peter Arden, a mining analyst at Ord Minnett Ltd in Melbourne. "The only way the smaller, mid-sized mills can get access (to iron ore) is in the spot market."

Spot iron-ore prices, which include freight charges, have jumped 31% this year to US$94/t, according to the Steel Index. The benchmark Rio Tinto product from Australia is sold at US$61t to Japanese and Korean customers. It costs about US$14.327/t to ship ore from Australia to China.

There are 152 importers of iron ore in China this year, exceeding the 112 licenses handed out, the steel group said. Iron ore sold in cash market accounted for 83% of imports this year, the steel association said.

(Bloomberg, July 31)

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