Iron, like any other industrial commodity devoured by China's booming economy, has sharply increased in price in the last few years
Unlike most commodities, though, iron prices are not set by trading activity in Chicago, New York, or London, but by industrialists in closed negotiations.
Every year, the handful of mining firms that control the world's iron sit down with a carefully chosen handful of major steel firms for a series of negotiating sessions.
Managing relationships is a critical part of the process. A lack of negotiating skill can drastically alter profitability across entire industries.
Relationship management is one skill the Chinese are famous for, but that skill has been conspicuously absent in the past few years. After having been forced to weather a 71% price increase negotiated by Japan in 2005, China demanded, and was given, the lead in negotiations for 2006.
But it failed to deliver. Negotiating through Baosteel, China allowed the talks to drag on for months, as it held out for a smaller price rise, and was eventually pushed into accepting a 19% hike when rival steelmakers made deals on their own. The agreement took the price of one tonne of iron ore to US$77.35. (In 2004, iron ore cost US$37.9 per tonne.)
This year has been different. In December, Baosteel inked a deal with for Brazilian iron giant Companhia Vale do Rio Doce (CVRD), the largest iron producer in the world.
The agreement, brokered in near record time, set a 2007 price increase of 9.5%, exactly what Baosteel was looking for. Almost as important as the price increase, the quick and quiet deal recognized China's preeminent status as the world's top steel maker.
Last year, Chinese officials, speaking through state media, harshly accused miners of "unreasonable" and "damaging" behavior in negotiations.
However, Richard Herselman of Steel Business Briefing said the poorly managed negotiations underlined a loss of face.
"Last year was the first time [China] was given the lead in negotiations. Those negotiations were drawn out much longer than expected on top of a large increase in price… which was an embarrassment for the Chinese".
The country's vast appetite for steel has put serious pressure on miners to come to terms with a new, dominant customer. China consumes nearly 40% of the world's iron according to UN data while the Ministry of Trade reports a 38% increase in production at domestic iron mines over the past year.
MEPS, a steel industry consultancy, estimates that yearly growth in global steel consumption has averaged 6% since 2000, and that more than half of that growth has come from the PRC. Relationships with China are fast becoming the most important element in the steel industry.
"China is today the world's largest iron ore consumer. So it is fair enough that China plays an active role in the negotiations," said Fernando Thompson, CVRD's chief spokesman.
These sentiments were echoed by Nick Cobban of Rio Tinto, Australia's top iron miner, who was equally pleased by the results of the negotiation.
"Obviously we're glad that a deal was reached so quickly… [and] we're very comfortable with the role China has played."
The new price is a sign that both the miners and their Chinese customers have realized that they have a long-term relationship to manage and neither party gains from an acrimonious, drawn out negotiation.
While there are plenty of other players, miners have to realize that no price can be set firmly without China's participation, and the Chinese must accept that the iron they need is supplied by only a few, closely connected giants not easily manipulated or bullied.
"China is still fairly new to these negotiations," notes Herselman and "they were still inexperienced and learning to manage the negotiations process."
The very low key negotiations this year are proof that when it comes to relationships, China is a fast learner.
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