Market
Conference
China's battle for iron ore
作者：1 發(fā)布時間：2010-05-06 文字大?。?span id="da">【大】【中】【小】
By Ryan Rutkowski
NANJING - Steel is the backbone of China's economic miracle. Last quarter, China's economy grew by a blistering 11.9% from a year earlier. More than 43% of this growth was from investment in fixed assets, such as roads, factories, houses, and machinery. These fixed assets rely heavily on steel, whether as a building material or construction machinery.
Iron ore is a raw material critical to steel production. As such, maintaining stable iron-ore prices is vital to economic growth, essentially giving stability to the cost of building a modern economy. However, in recent years, China has struggled to maintain stable iron-ore prices, as increasing demand for ore from abroad has made China vulnerable to shifts in the global marketplace.
For the past 40 years, major global iron-ore suppliers and buyers have used an annual benchmark pricing system to decide iron-ore contracts. In this system, the first contract price negotiated with major iron-ore suppliers and buyers for the year would be used by all future contracts between steel mills and suppliers in the same year. This helped steel mills hedge against the risk of price rises in the cost of steel production, and as steel is the building block of industry, this also ensured stable prices in a wide range of modern production, such as automobiles, ship building, construction, and industrial machinery. This system was only beneficial to suppliers so long as there was no certain guarantee of significant demand for iron ore that would outstrip supply and cause rapid price rises.
However, in recent years, increasing steel production in China has driven up demand for iron ore, leading suppliers to consider changing the system to shorter contracts based more closely on market prices. In 2009, China demanded almost 60% of the world's iron ore to produce 47% of world's steel production.
The steel industry in China is a pillar industry that is highly fragmented and prone to over-production. In 2005, an attempt by the National Development and Reform Council to consolidate the industry had the unintended consequence of boosting steel production, as entrenched political powers fought to boost output to protect local steel mills. As a result of increasing Chinese demand, iron-ore prices have risen from an average of US$37 per tonne on the Brazilian spot market in 2004 to an average of $101 per tonne for 2009. Today, more than half of China's iron-ore demand is met through imports, primarily from Brazil and Australia.
Brazil, Australia, and China are the world's largest producers of iron ore. Despite China's massive production, it is a net importer of iron ore, a testament to the country's strong demand. On the other hand, Brazil and Australia have comparatively low domestic demand for iron ore, allowing them to dominate global exports of the commodity. Moreover, Brazil and Australia are producers of a high grade iron ore, with over 50% of it being iron, whereas only 32% of Chinese ore is iron. This has allowed the "big three" iron-ore suppliers, Brazil's Vale and Australia's Rio Tinto and BHP Billiton, to gain a dominant stake in the marketplace of 68.5% of global iron-ore shipments.
The "big three" have taken advantage of their position as global exporters to shift to a shorter term pricing system. On March 30, Vale announced it reached an agreement with Japan's Sumitomo Metal Industries Co for a quarterly contract at a price 90% higher than the previous year to take effect April 1. Subsequently, Rio Tinto and BHP Billiton announced they will also seek shorter-term price contracts in future deal with Asian mills, effectively shifting to a quarterly market system.
As the world's largest buyer of iron ore, China is attempting to leverage its position to resist shorter-term contracts. Last year, the China Iron and Steel Association (CISA) attempted to use the country's massive demand as a bargaining chip to push the "big three" to lower prices.This failed, as individual Chinese steel mills were more desperate for iron ore than the "big three" were to sell it to them. As a result, mills made their own agreements or purchased iron ore on the spot market at a much higher cost.
Similar tactics this year have continued to leave China in a stalemate on price negotiations. Chinese negotiations have been led by Baosteel Group Corp, China's largest steel producer, rather than the CISA. China opposes shifting to a shorter-term pricing system and the 90-100% price increases suggested by Vale. China is trying to play hard ball. The CISA had called on domestic steel mills and traders to stop buying iron ore from Vale, BHP Billiton, and Rio Tinto for two months, and rely on existing inventories iron ore temporarily. China has also announced that it may conduct an investigation into a possible iron-ore oligopoly of Rio Tinto, BHP Billiton, and Vale.
China's long-term strategy to reduce dependency on iron ore from the "big three" is to increase investment in overseas iron-ore mining. China's Metallurgical Industry Planning and Research Institute has called for enhancing exploration for domestic iron ore and increasing investment in overseas mining operations.
China's overseas investment in iron-ore mining has been concentrated in West Africa, Russia, Australia, and Southeast Asia. On April 1, China Railway Materials Commercial Corporation agreed to work with African Minerals to develop the Tonkolili iron-ore deposit in Sierra Leone. Chinese steel mills have also turned to smaller iron-ore miners to secure cheaper price contracts. On April 22, Sinosteel Corp, the nation's largest iron-ore trader, announced it would buy half the output from Brockman Resources Ltd's Marillana project in Western Australia.
However, China will not have any leverage in price negotiations until it can wean itself from fast-growing demand for iron ore. China has relied on fixed investment to provide employment and maintain economic growth by building real estate, infrastructure, and expanding industrial capacity throughout the country. In 2009, Chinese banks lent a record 9.59 trillion yuan (US$1.4 trillion) to keep the country's economy afloat during the economic crisis. As a result, fixed investment reached a record 66% of gross domestic product (GDP) in 2009, up from 54% in 2008. This helped to maintain overcapacity in the domestic steel industry, while global demand for steel was low.
A significant increase in iron-ore prices could be detrimental for China's domestic steel industry. China has more than 700 steel mills across the country, with the top five producers controlling less than 30% of output. Despite a licensing system designed to monitor iron-ore importers, many traders buy iron ore at lower contract prices and resell on the spot market for a higher value.
Shanghai Securities News reports that price growth in iron ore this year will lead to a 90 billion yuan increase in costs for steel producers. Many steel mills are still recovering from low profit margins in 2009 in which a 1.69% rise in costs would have put most state-owned mills in the red. Significant consolidation would be at the expense of employment in many localities, especially in relatively inefficient inland mills.
Despite China's resistance to shorter-term contracts, domestic mills will be forced to accept price rises and pass on prices to domestic manufacturers to maintain profitability. Many smaller steel mills have already signed quarterly contracts, signaling another failure at this year's price negotiations. In April, the domestic price of high quality iron ore was up 11.4% from March and steel prices were up over 5.5% from March.
Traditionally, China has been able to resist price rises in raw materials by forcing state-owned steel mills to temporarily book the losses on price rises. However, as stimulus money is withdrawn, shaky profit margins in the steel industry may force state policymakers to allow mills to increase prices. On April 19, Baoshan Iron & Steel, a unit of Baosteel Group and the largest publicly trading Chinese steelmaker, announced it would increase prices of cold-rolled steel pipes in May. It is likely that other still mills will follow suit.
This move could potentially fuel price inflation in the world's third-largest economy. In the first quarter of 2010, producer prices were up 9.9% from 2009 mainly driven by a rise in nonferrous metals, such as iron ore, of 30.2%. While China's consumer price index rose by 2.2% from the same period in 2009 there is some concern that this could translate into rising domestic inflation by increasing prices in a variety of goods, from cars to appliances, that use steel for manufacturing. More importantly, this might also mean increased costs of infrastructure and real-estate development for a country that has is still highly dependent on fixed investment for economic growth. Indeed, despite government efforts to slowdown housing prices, China's real estate prices rose 11.7% in March from the same period in 2009.
Ryan Rutkowski is a masters student studying international economics at the Johns Hopkins-Nanjing University Center for Chinese and American Studies.
(Copyright 2010 Asia Times Online (Holdings) Ltd. All rights reserved. )
Sourced from www.atimes.com
NANJING - Steel is the backbone of China's economic miracle. Last quarter, China's economy grew by a blistering 11.9% from a year earlier. More than 43% of this growth was from investment in fixed assets, such as roads, factories, houses, and machinery. These fixed assets rely heavily on steel, whether as a building material or construction machinery.
Iron ore is a raw material critical to steel production. As such, maintaining stable iron-ore prices is vital to economic growth, essentially giving stability to the cost of building a modern economy. However, in recent years, China has struggled to maintain stable iron-ore prices, as increasing demand for ore from abroad has made China vulnerable to shifts in the global marketplace.
For the past 40 years, major global iron-ore suppliers and buyers have used an annual benchmark pricing system to decide iron-ore contracts. In this system, the first contract price negotiated with major iron-ore suppliers and buyers for the year would be used by all future contracts between steel mills and suppliers in the same year. This helped steel mills hedge against the risk of price rises in the cost of steel production, and as steel is the building block of industry, this also ensured stable prices in a wide range of modern production, such as automobiles, ship building, construction, and industrial machinery. This system was only beneficial to suppliers so long as there was no certain guarantee of significant demand for iron ore that would outstrip supply and cause rapid price rises.
However, in recent years, increasing steel production in China has driven up demand for iron ore, leading suppliers to consider changing the system to shorter contracts based more closely on market prices. In 2009, China demanded almost 60% of the world's iron ore to produce 47% of world's steel production.
The steel industry in China is a pillar industry that is highly fragmented and prone to over-production. In 2005, an attempt by the National Development and Reform Council to consolidate the industry had the unintended consequence of boosting steel production, as entrenched political powers fought to boost output to protect local steel mills. As a result of increasing Chinese demand, iron-ore prices have risen from an average of US$37 per tonne on the Brazilian spot market in 2004 to an average of $101 per tonne for 2009. Today, more than half of China's iron-ore demand is met through imports, primarily from Brazil and Australia.
Brazil, Australia, and China are the world's largest producers of iron ore. Despite China's massive production, it is a net importer of iron ore, a testament to the country's strong demand. On the other hand, Brazil and Australia have comparatively low domestic demand for iron ore, allowing them to dominate global exports of the commodity. Moreover, Brazil and Australia are producers of a high grade iron ore, with over 50% of it being iron, whereas only 32% of Chinese ore is iron. This has allowed the "big three" iron-ore suppliers, Brazil's Vale and Australia's Rio Tinto and BHP Billiton, to gain a dominant stake in the marketplace of 68.5% of global iron-ore shipments.
The "big three" have taken advantage of their position as global exporters to shift to a shorter term pricing system. On March 30, Vale announced it reached an agreement with Japan's Sumitomo Metal Industries Co for a quarterly contract at a price 90% higher than the previous year to take effect April 1. Subsequently, Rio Tinto and BHP Billiton announced they will also seek shorter-term price contracts in future deal with Asian mills, effectively shifting to a quarterly market system.
As the world's largest buyer of iron ore, China is attempting to leverage its position to resist shorter-term contracts. Last year, the China Iron and Steel Association (CISA) attempted to use the country's massive demand as a bargaining chip to push the "big three" to lower prices.This failed, as individual Chinese steel mills were more desperate for iron ore than the "big three" were to sell it to them. As a result, mills made their own agreements or purchased iron ore on the spot market at a much higher cost.
Similar tactics this year have continued to leave China in a stalemate on price negotiations. Chinese negotiations have been led by Baosteel Group Corp, China's largest steel producer, rather than the CISA. China opposes shifting to a shorter-term pricing system and the 90-100% price increases suggested by Vale. China is trying to play hard ball. The CISA had called on domestic steel mills and traders to stop buying iron ore from Vale, BHP Billiton, and Rio Tinto for two months, and rely on existing inventories iron ore temporarily. China has also announced that it may conduct an investigation into a possible iron-ore oligopoly of Rio Tinto, BHP Billiton, and Vale.
China's long-term strategy to reduce dependency on iron ore from the "big three" is to increase investment in overseas iron-ore mining. China's Metallurgical Industry Planning and Research Institute has called for enhancing exploration for domestic iron ore and increasing investment in overseas mining operations.
China's overseas investment in iron-ore mining has been concentrated in West Africa, Russia, Australia, and Southeast Asia. On April 1, China Railway Materials Commercial Corporation agreed to work with African Minerals to develop the Tonkolili iron-ore deposit in Sierra Leone. Chinese steel mills have also turned to smaller iron-ore miners to secure cheaper price contracts. On April 22, Sinosteel Corp, the nation's largest iron-ore trader, announced it would buy half the output from Brockman Resources Ltd's Marillana project in Western Australia.
However, China will not have any leverage in price negotiations until it can wean itself from fast-growing demand for iron ore. China has relied on fixed investment to provide employment and maintain economic growth by building real estate, infrastructure, and expanding industrial capacity throughout the country. In 2009, Chinese banks lent a record 9.59 trillion yuan (US$1.4 trillion) to keep the country's economy afloat during the economic crisis. As a result, fixed investment reached a record 66% of gross domestic product (GDP) in 2009, up from 54% in 2008. This helped to maintain overcapacity in the domestic steel industry, while global demand for steel was low.
A significant increase in iron-ore prices could be detrimental for China's domestic steel industry. China has more than 700 steel mills across the country, with the top five producers controlling less than 30% of output. Despite a licensing system designed to monitor iron-ore importers, many traders buy iron ore at lower contract prices and resell on the spot market for a higher value.
Shanghai Securities News reports that price growth in iron ore this year will lead to a 90 billion yuan increase in costs for steel producers. Many steel mills are still recovering from low profit margins in 2009 in which a 1.69% rise in costs would have put most state-owned mills in the red. Significant consolidation would be at the expense of employment in many localities, especially in relatively inefficient inland mills.
Despite China's resistance to shorter-term contracts, domestic mills will be forced to accept price rises and pass on prices to domestic manufacturers to maintain profitability. Many smaller steel mills have already signed quarterly contracts, signaling another failure at this year's price negotiations. In April, the domestic price of high quality iron ore was up 11.4% from March and steel prices were up over 5.5% from March.
Traditionally, China has been able to resist price rises in raw materials by forcing state-owned steel mills to temporarily book the losses on price rises. However, as stimulus money is withdrawn, shaky profit margins in the steel industry may force state policymakers to allow mills to increase prices. On April 19, Baoshan Iron & Steel, a unit of Baosteel Group and the largest publicly trading Chinese steelmaker, announced it would increase prices of cold-rolled steel pipes in May. It is likely that other still mills will follow suit.
This move could potentially fuel price inflation in the world's third-largest economy. In the first quarter of 2010, producer prices were up 9.9% from 2009 mainly driven by a rise in nonferrous metals, such as iron ore, of 30.2%. While China's consumer price index rose by 2.2% from the same period in 2009 there is some concern that this could translate into rising domestic inflation by increasing prices in a variety of goods, from cars to appliances, that use steel for manufacturing. More importantly, this might also mean increased costs of infrastructure and real-estate development for a country that has is still highly dependent on fixed investment for economic growth. Indeed, despite government efforts to slowdown housing prices, China's real estate prices rose 11.7% in March from the same period in 2009.
Ryan Rutkowski is a masters student studying international economics at the Johns Hopkins-Nanjing University Center for Chinese and American Studies.
(Copyright 2010 Asia Times Online (Holdings) Ltd. All rights reserved. )
Sourced from www.atimes.com
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