Behind China’s steel pricing farce

Evidence of disunity within the industry was also emerging, as well as contradictory claims made by Beijing, regional steel makers, coal and coke production, and electricity generation.

Beijing was infuriated when smaller mills, in order to maintain operations and meet demand, purchased Brazilian iron ore on the spot market.

The failure of negotiations and acceptance by Japan and South Korea of the price cut infuriated the CCP and loss of face was looming. China had been too aggressive in its demands and left no face saving way out.

Domestic cost increases

In China the price of coal, coke, water, electricity, transport, and labour are escalating. China’s intention is to offset domestic cost increases with heavily discounted imported iron ore.

2009 shipments and the spot market

For the 1st half of 2009, crude steel production was up 29.3 per cent to 297 million tonnes and imports were up to 131 million tonnes. Carriers reported being unable to unload ore because of stockpiles at the docks and steel producers yards. There were rumours of impending litigation by a major miner against Chinese steel mills for refusing to meet contractual obligations and accept contracted shipments of iron ore.

An analysis of purchases and shipping movements however reveals that 82.7 per cent of China’s iron ore imports during the 1st half 2009, were on the spot market.

April 2009 spot prices were US$58/tonne while July 2009 recorded prices above US$100/tonne. China’s 2nd quarter 2009 purchases from Brazil totalling 36 million tonnes were spot market contracts (70 per cent of the total purchases.)

Beijing intends to cancel spot market orders placed by smaller mills for Brazilian ore.

Beijing created the pricing problem

While Beijing cries foul, vilifies the ore miners and attempts to pressure the Australian government, the reason behind the push for the 40 per cent cut becomes clear with an understanding of China’s iron ore buying practices.

China intended to play hardball and to up the ante: China’s law enforcement agencies arrested Rio Tinto’s lead negotiator and local executive Stern Hu. The charges ranged from espionage by stealing state secrets, undermining the Chinese economy, corruption and bribery of China’s steel executives.

The way out

Beijing can now claim a timely excuse for failing to succeed in the highly publicised price negotiations; i.e. that Rio Tinto’s Stern Hu had used criminal tactics to steal commercial secrets of China’s steel industry by espionage and the bribery of China steel executives.

Beijing is claiming Rio Tinto’s criminal tactics not only undermined the Chinese government’s efforts to negotiate a fair iron ore price, but it stole highly sensitive secret information that can undermine China’s steel industry and seriously impact on China’s efforts for an economic recovery from the global recession.