It is reported that before the new round of international negotiations on iron prices begins in the new year, the world's largest iron ore producer, Vale is trying to break China's steelmakers’ solidarity, urging some to accept part of its unilateral ore price increases. Its efforts, though, may promote unintended consequences.

 

As per report on October 10th Chinese media reported that five domestic steel mills, including China's second largest steel enterprise, Jiangsu Shagang, have accepted Vale’s price increase for a small part of supply. Later in the day, however, both Shagang and the China Iron and Steel Association issued denials and Shagang said it would always stand on the side of CISA.

 

Vale informed its Asian customers in early September that it wanted an iron price hike of 11% to 11.5% on this year’s contract. Wuhan Iron and Steel Corporation admitted at the time that it worried greatly about shortages of iron ore. However, 80 million tonnes of ore backlogged in port as well as coordination by CISA on September 23rd quickly eased supply tensions in the steel industry.

 

Mr Shan Shanghua CISA Secretary General said that for protection domestic steel firms need to stockpile domestic ore reserves to survive the winter. If steel enterprises do not now acquire iron ore by cash, it will be hard for domestic iron miners to maintain production. Shrinkage of minerals production would not be conducive to iron ore negotiations in 2009.

 

Industry concentration of Chinese iron and steel in 2007 was only 36.8%, lower than the world average of 39.7%, which weakens Baosteel’s position, as negotiation representative in the global ore and consumer market, to have the final say in prices as Mittal and Nippon Steel do.

 

While Chinese steel enterprises large or small are in consensus on the issue of boycotting Vale’s price increase, their situations and state of mind differ greatly in the current industrial adjustment. But many of the medium and smaller-scale have so far resisted consolidation. On the one hand, low industrial concentration and acquisition barriers accompany strong demand, for high profits bring strong desire for self-expansion of steel firms and resistance to outside M&A. Local governments also have conflicts on cross-regional issues. But with external pressures from BHP Billiton’s attempt to acquire Rio Tinto and Vale’s demanded price increase, and sluggish domestic demand in the real estate and automotive markets, has come an unexpected drop in the price of steel. Four of the largest steelmakers totaling 16% of the national output were forced to announce a 20% reduction in production in October boost prices. And the two largest steel concerns, Baosteel and Shagang, are also considering cuts. With profits melting and smaller steel mills seeking protection, local governments trying to restructure local steel enterprises on their own may well falter.

Editor:    Ivy

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