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“The outlook for the European market is unclear and steel prices may keep falling,” Shan Shanghua, general secretary of the association, said in an interview. “I dare say right now no Chinese steelmakers would accept the third-quarter prices asked” by Vale SA, Rio Tinto Group and BHP Billiton Ltd., he said.

Vale, BHP and Rio, the biggest iron ore exporters, may demand a 30 percent price increase for the July quarter, China Steel Corp. said last month. Falling steel prices in China may force some mills to cut output and default on quarterly iron ore contracts, Baosteel Group Corp. said June 8.

“The steel market hasn’t returned to the levels before the global crisis” while iron ore prices are rising, Shan said by phone from Beijing. “That’s unsustainable.”

Chinese steel prices have fallen 10 percent from an 18- month high on April 15, as the government imposed measures to curb speculation in the property market. Demand from makers of cars and appliances have also slowed, according to Baosteel, the nation’s second-largest mill.

Vale, the biggest supplier of iron ore, won a 90 percent price increase for April quarter contracts after the three exporters dropped a 40-year custom of setting annual prices. Contract prices for the July quarter will rise from the previous three months, and Chinese customers may default to buy cheaper ore on the spot market, Jose Carlos Martins, Vale’s executive director of iron ore, said June 1.

Falling Prices

Prices for 62 percent iron-content ore arriving at Chinese ports have dropped 22 percent to $144.70 a ton yesterday from $186.50 on April 21, according to The Steel Index.

The existing method for pricing contract iron ore “is being challenged by the market just one quarter after its birth,” Shan said. “Suppliers should look into the market changes and adopt counter measures. We have suggested to the suppliers to peg quarterly prices on steel prices.”

Vale prices its quarterly contracts on a three-month average spot price, the company said June 1.

Rio and BHP will offer Chinese steelmakers iron ore prices on a monthly basis, Metal Bulletin, an industry publication, said this week, citing unidentified officials at Jiangsu Shagang Group Co. and Wuhan Iron & Steel Group.

No Orders

Shagang Chairman Shen Wenrong denied the report, saying China’s fifth-largest steelmaker hasn’t received any such offer.

“We haven’t placed orders for imported ore for a while,” Shen said in a phone interview. “Chinese steelmakers won’t place orders if they would incur losses at that price.”

Shan of the steel association said he hasn’t heard of a monthly price offer from Rio and BHP.

Having iron ore sold on contracts and on the spot market is leading to a “disorderly market,” Shan said.

The steel association, representing China’s biggest steelmakers, has called for one unified price for all imported iron ore since 2008. Smaller mills and traders buy most of China’s spot imports, which account for as much as 20 percent of total shipments, Shan said.

--Helen Yuan. Editors: Tan Hwee Ann, Keith Gosman

To contact the editor responsible for this story: Andrew Hobbs at ahobbs4@bloomberg.net.

Sourced from www.businessweek.com