The price cap on iron ore relates specifically to imports coming from the world's two major producers, Australia and Brazil, who face losing Chinese orders should their prices exceed US$54 per tonne and US$64 per tonne respectively.
As the global leader in iron ore imports, Beijing expressed dissatisfaction last year as producers secured a 71.5% rise in the price of the raw material. While a smaller increase of 10-20% is expected for 2006, China's capping strategy is likely to have an impact on iron ore spot prices. But Beijing's ultimate objective is greater influence over the long term contract prices for the resource.
Annual iron ore contract prices were traditionally decided upon as a result of discussions held between Australia and Brazil and the steel producers of Europe and Japan. However, this year's negotiations saw China's largest producer, Baosteel, invited to the table.
Skepticism remains in some quarters as to whether Beijing will actually follow through on its price cap threats. More likely, the caps are being used as leverage to try and secure lower raw material prices for Chinese steel mills that are already feeling the squeeze.
The National Development and Reform Commission (NDRC) announced last month that high iron ore prices and continued oversupply of steel will hit producers' profits during 2006. This comes after a rough ride in 2005 during which steel output rose 24.6% on the previous year but the average price of steel products fell 24.7% over the same period.
With 349 million tons of the metal produced last year and output capacity accelerating toward the 500 million ton mark, the NDRC aims to limit production to 400 million tons by eliminating 100 million tons of iron capacity and 55 million tons of steel capacity over the next five years.
Having cut prices twice during 2005, Baosteel announced plans to boost prices between 13% and 15% in the second quarter of this year. Wuhan Iron & Steel and Angang New Steel followed suit but this move is unlikely to calm the market for long.
The threat of closure by the government was said to have driven smaller-scale producers to increase output in an attempt to convince Beijing of their economic viability. This has only served to exacerbate the oversupply problem.
Chalco set for record buy
Aluminum Corp of China is to submit a final bid in May to build a US$2.2 billion bauxite mine and refinery in Queensland in what would be China's biggest ever investment in Australia. The deposit is of sufficient size to produce aluminum for 2.5 million Boeing 747-400 aircraft. Chalco's rival bidders Alcoa, Alcan and Cia Vale do Rio Doce pulled out of the race last month. With Australia holding 22% of the world's proven bauxite reserves, compared to China's paltry 2%, Beijing is expected to invest a considerable amount of money in the country. Australia is also one the world's leading producers of coal and iron ore.
Focus shifts to high-end steel
Aben Iron and Steel Group, the country's second-largest steel producer, said it would focus on high-end products used in cars and computer chips in order to boost crude steel production capacity by 65% over the next five years. The move represents a repositioning of Anben's output as it works to conform to government requirements for the closure of heavy polluting and high energy consuming facilities producing low-end construction steel. As crude steel capacity increases to 30 million tonnes by 2010, the company will shut down 7.27 million tonnes of outdated iron-producing capacity and 4.85 million tonnes of crude steel capacity over the same period. Beijing wants to reduce energy consumption per unit of GDP by 20%, major pollutants by 10% and water consumption per unit of industrial value addition by 30% over the next five years.
Hunan Metals on IPO march
The country's leading nonferrous metal producer, Hunan Nonferrous Metals, began its management road-show with a view to launching a US$200 million initial public offering by the end of March. Sponsored by BOC International and Morgan Stanley, the company was said to be offering 1.1 billion shares, which equates to 33% of enlarged share capital. Hunan Nonferrous stepped up its preparations in response to news that Advanced Semiconductor Manufacturing, seen as a rival for investor attention, had started book-building in anticipation of an April 7 trading debut. Hunan Nonferrous is the biggest producer of tungsten, antimony and zinc in China.
Rio Tinto revises deadline
Mining giant Rio Tinto said it would move forward the completion date for a copper smelter in eastern Shandong province in order to meet rising demand created by China's soaring industrial output. Construction of the smelter at Yanggu Xiangguang Copper Co began last year and is now scheduled for completion in late 2006. Built by Outokumpu of Finland, initial production volume will be 200,000 tonnes of cathodes a year but this will rise to 400,000 tonnes a year. China is the world's largest copper consumer, importing 1.217 million tons of refined copper last year, an increase of 1.8% year-on-year.
Silvercorp to take mine stake
Canadian firm Silvercorp Metals signed an agreement to buy a 60% stake in the Hou Ping Gou silver, gold and lead mine, in central Henan province's Ying Silver Project area. Silvercorp will contribute US$5.2 million in capital with its joint venture partner, HT Mining, putting forward the mine assets and required operating permits. The mine, which has been running for about five years, produces 200-250 tonnes of ore per day at a cost of US$30 per tonne. Silvercorp is developing the Ying Silver Project through its 77.5%-owned subsidiary, Henan Found Mining Co. The provincial government holds the remainder.
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