China ore standoff shows limits to economic clout

[February 02, 2010]  HONG KONG (AP) -- China is pressing to turn its status as the world's biggest steel producer into clout over global miners and cheaper iron ore prices. But its tactics failed in 2009 and there are few indications it will fare better this year.

In a sign of the limits of China's growing economic might, months of price talks last year broke off without the price cuts demanded by Beijing, and tensions were heightened by the arrest of four Rio Tinto employees on spying charges.

Chinese mills wound up paying the same price as Japanese and South Korean producers -- or more because they had to buy on the spot market where prices often exceed the contract rates.

This year, China's steel industry faces difficult odds as it tries again to get a better deal.

Steel demand is surging as the government's stimulus spending feeds a construction boom and Chinese consumers snap up more cars, appliances and other goods. The country's mills are expected to churn out as much as 640 million metric tons of steel this year compared to about 570 million metric tons in 2009, when China produced almost half the world's steel.

As production has shot higher, so have prices for iron ore, the key material in steel. Since last year, ore prices have nearly doubled to more than $120 a metric ton on the spot market.

China had hoped to be in a stronger bargaining position this year by consolidating its sprawling industry to present a unified front against the three big mining companies, which control most of the world's iron ore supplies.

But the industry has yet to undergo a big enough restructuring. That's left too many mills to cut their own deals with miners or boost production without paying heed to the government's industry goals.

"The suppliers are concentrated and the buyers are fragmented, so it makes it difficult for China to have bargaining power," said Helen Lau, senior research analyst at OSK Securities in Hong Kong.

Nor can China go around the major ore producers, Anglo-Australian miners Rio Tinto Ltd. and BHP Billiton Ltd. and Brazil's Vale SA.

Its own reserves scattered without enough high quality ore, China has become increasingly reliant on foreign supplies. Mills imported some 72 percent of their iron ore last year, an all-time high and up dramatically from 33 percent a decade before, according to a report by Umetal, a Beijing-based research group.

China has objected to the dominance of the top miners -- the three supply some 70 percent of iron ore transported by sea -- and tried to rally global opposition against a proposed joint iron ore venture between BHP and Rio Tinto. On Monday, European Union regulators promised to investigate complaints the tie-up could damage competition and lead to higher prices.

In search of alternatives, Chinese companies have been pouring investment into other mining firms from Venezuela to Canada. But the operations are relatively small or years away from significant production.

With demand strong, analysts say the benchmark contract price, traditionally set through talks between the miners and Asian countries, will only rise this year, with some estimating a hike of 40 percent or more.

Whether China will agree to a benchmark contract in 2010 is far from certain. But with few expecting ore prices to fall this year, buying through the spot market could prove more costly.

"Either way, China will have to pay up for iron ore," said Alexander Latzer, head of Asia metals and mining research at Daiwa Capital Markets in Hong Kong.

China appears to be bracing for tough negotiations.

Luo Bingsheng, vice chairman of the government-affiliated China Iron and Steel Association, which led last year's failed talks, said the miners were expected to demand prices 20 percent to 30 percent above last year's benchmark price, the China Securities Journal reported in December. He believed "the difficulty of the talks is very big," the paper reported.

Representatives for BHP, Rio Tinto and Vale declined to comment on negotiations.

Once last year's talks collapsed, China ended up buying some 60 percent of its iron ore from the spot market, where prices rose far above the benchmark.

For China, the shift away from a yearly contract, a long-standing price system preferred by other major steel producers like Japan and South Korea, is likely to continue, analysts say.

That's partly because miners are looking to avoid the complications of negotiating with China, analysts say. Spot prices also favor suppliers. BHP has been pushing toward shorter-term arrangements.

But many Chinese companies are still willing to buy through the spot market and "either positively or passively giving up" on a long-term contract, according to Umetal.

Chinese officials, meanwhile, are keeping up their quest for more influence over the miners and prices.

"The international iron ore market is monopolized by the three leading miners," Zhu Hongren, spokesman for the Ministry of Industry and Information Technology, said last week, according to state media.

"We hope that they will bear in mind long-term interests of the industry and friendly long term cooperation with China. We're expecting a fair price which could be accepted by both sides."

[Associated Press; By JEREMIAH MARQUEZ]

AP researcher Xi Yue contributed to this report from Beijing.

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