Prospects for China's next round of iron ore price negotiations

Even though the 2006 international iron ore price negotiations between China and global iron miners just concluded several months ago, the start of the new round of price negotiations for 2007 is very close – scheduled for the end of October. China's representatives have already several times contacted their counterparts from the world's top three iron ore suppliers with a view to preparing for the upcoming negotiations. Although a number of weeks remains to the kick-off of the official talks, both sellers and buyers of iron ore are trying to prepare an atmosphere that will be conducive to their own particular positions. The sellers consider that there is still a margin for a hike in the price of iron ore. One of the key factors they use to back their viewpoint is that the current average spot price of iron ore is higher than the long term price. The sellers claim that although the worldwide iron ore suppliers are expanding their output rapidly, for the present, the price of iron ore should maintain its upward trend due to the continuous increase of steel output. The Chinese buyers, however, are not in agreement and maintain an uncompromising attitude. In backing their claims for an iron ore price reduction, they cite the following points: Downward trend has appeared in iron ore imports In the first quarter of 2006, China's imports of iron ore increased by 27.73 percent year on year. However, in the second quarter, the same figure dropped to 18.45 percent. The total quantity of imported iron ore in the second quarter was down five million tons on the first quarter. It is estimated this trend will continue in the coming months up to April, 2007. The total quantity of imported iron ore in 2006 probably will reach 312 million tons with a yearly growth rate of around 13.5 percent. Compared to the average 30 percent plus yearly growth rate prior to 2006, a slowdown in imports is apparent. Output of domestic iron ore has increased sharply Due to the rapid increase of domestic fixed assets investment in iron mines, China's iron ore output has increased at high speed. By the end of July this year, the total domestic iron ore output had reached 296 million tons, i.e., an increase of 77 million tons (35.27 percent up) on last year. Average domestic iron ore price is lower than import price For a long time in China, the average domestic price of iron ore was higher than the import prices. However, this situation underwent a change recently. During May and July, the average domestic price of iron ore was lower than the price for imports by around US$ 15 per ton. This was a milestone in China's steel industry and will undoubtedly put great pressure on the price of imported iron ore. The Chinese buyers would argue that there are additional factors in favor of their stance – e.g.,the decrease in the export tax rebate for steel products in September, new parties supporting the interests of the domestic steel traders will probably join the Chinese negotiation team, and also the number of qualified iron ore importers will perhaps be reduced further to 91. The buyers are of the opinion that the 2007 iron ore price negotiations will be resolved in their favor.