After months of negotiations – which left iron ore traders in a state of subdued collective anticipation – China’s Baosteel Group agreed to pay 19% more for iron ore than it did last year.
Nobody was really surprised at the June 20 announcement.
Iron ore is unusual in that prices are negotiated once a year with the world’s big three iron ore miners – BHP, Brazil’s Cia Vale do Rio Doce (CVRD) and Anglo-Australian group Rio Tinto. Once the world’s other large-scale steelmakers lost patience with Chinese prevarication and agreed to the 19% price hike, China was effectively forced into submission.
Still, Beijing’s appointed negotiator Baosteel did assert itself and, even if the approach failed to achieve significant results, the message was clear: there is one more big kid on the block and iron ore producers must respect its buying power.
The settlement was preceded and followed by angry remarks from China directed at the rest of the world for breaking ranks and complying with the price demands of mining companies. Needing all the iron ore it can get, China had no choice but to follow suit. It was caught on one side by its own slow reaction time and on the other by its undeniable need for more ore.
"I think it is pretty safe to say that demand will continue to increase," said Richard Herselman of Steel Business Briefing.
China has been looking for ways to reduce consumption by making steel production more efficient and closing smaller mills. But Herselman believes these small mills will lobby to stay open or amalgamate rather than close.
"They are just going big," he said.
Beijing’s interest in efficiency notwithstanding, local officials have to deal with the day-to-day realities of unemployment at home. Shutting down a mill can put hundreds of thousands out of work.
Another factor is the quantity versus quality issue. Despite increases in domestic production, which grew 45% in 2005 to a total of 197 metric tons, according to a Citigroup report, imports have gone up 22% because the ore coming out of China is of poorer quality.
"Because they need more and more, they are mining iron ore reserves of ever lower quality quality," Herselman said.
Spread the risk
On the other hand, China is now looking to reduce its dependence on the big three by investing in new mining efforts. There have been reports of plans to invest up to US$2 billion in projects around the world.
With all the recent movement, another significant hike in the near future is unlikely. The 71.5% increase in 2005 and the 19% this year were the steepest increases in a quarter of a century. This year’s rise alone may cost China’s importers about US$1.25 billion, according to state media.
"Miners are sitting on quite a bit of cash and a lot of this they are plowing back into the mines," Herselman said.
The result may be supply finally catching up with demand, prices staying flat and China taking on the role that befits its status as the largest importer in the world.