SteelOrbis Shanghai
After its agreement reached last Thursday with CVRD on a 9.5-percent increase in
iron ore costs for the 2007 fiscal year, on December 22
Baosteel also concluded similar settlements with
BHP Billiton and
Rio Tinto, thus laying the foundation for international
iron ore prices over the coming fiscal year.
This is the first time that
Baosteel has decided the international
iron ore prices, with the agreements reached attracting considerable attention, especially since they were concluded far earlier than expected. However, market insiders are not too surprised at the result and the spot market is still moving on a stable trend.
In fact, previously, the Chinese mills had been quite dissatisfied with the 71.5-percent increase accepted by the Nippon Steel Corporation (NSC) for the 2005 fiscal year. After that, in order to wait for
Baosteel's decision, both NSC and Arcelor were not eager to reach an agreement during the negotiation for the 2006 fiscal year.
Baosteel had an initial intention of agreeing a 10-percent increase with
Australia, but failed to conclude the deal because the Chinese government expressed a different
opinion on the matter.
At that time, the three
iron ore giants, especially CVRD, had difficulty obtaining the consent of the representatives of the three mills, and so they first signed an agreement with the medium-sized mills, before finally forcing the three leading mills to accept their terms. The strategy did work. In the end, the Chinese mills had to accept a 19-percent increase on June 21. Thus, the international negotiation on
iron ore for the 2006 fiscal year finally reached their conclusion.
The endless negotiations not exhausted the two parties, but were also harmful as regards future cooperation. Therefore, both parties changed their approach.
The mines did a lot of work on preparation and communication beforehand, especially on communication with
China's CISA (
China Iron and Steel Association) and relevant departments. The Australian mines also took the initiative in helping
China deal with its safety problems.
The Chinese government had learned its lessons and thus gave more freedom to
Baosteel, and this created a favorable environment for the negotiations to yield a successful result.
Although the
Taiwan mills think the 9.5-percent increase is on the high side, generally speaking, this increase meets the general market expectation, and represents the overall trend of the
iron ore market.
First of all, in spite of the decline in
pig iron output growth in
China this year, global
pig iron output is accelerating. With the global growth exceeding the previous year's level, the demand for
iron ore looks strong.
China's
pig iron output in 2005 increased 28.2 percent compared with that of 2004. Meanwhile, the
pig iron output in Jan-Nov 2006 only rose 19.8 percent year on year, 8.4 percentage points lower in growth. However, according to the statistics of the International Iron & Steel Association, the global output of blast furnaces in Jan-Nov 2005 was up 9 percent compared with the same period of the previous year. Meanwhile, the same figure for January to November 2006 increased 11.6 percent year on year, up 2.6 percentage points in growth.
In addition, due to the weak condition of the US economy recently, the USD exchange rate may continue moving on a downward trend.
Since the international
trading prices of
iron ore are settled in USD, the decreased USD exchange rate reduces revenues in their own currencies for the ore supplying countries. With
iron ore supply less than demand, the mines cannot accept this situation. As a result, it is natural for the
iron ore prices to include the depreciation of the USD.
Obviously, the price increase in
iron ore is not a good thing for the steel mills. However, this is not the case for the Chinese steel industry.
Firstly, the price increase in imported ore has forced the Chinese mills and mines to make the most of their resources. And this improvement in resource utilization complies with the “conservation economy” model proposed by the Chinese government.
Secondly, for the Chinese mills, the domestic market is still their major focus.
At present,
China has become the largest steel market in the world. If a domestic mill cannot claim a position in this market, it won't survive, not to mention develop. Although exports relieved the pressure brought by the
production increase this year, the Chinese government has announced and will continue to announce more measures to curb exports. Consequently, it is not possible for the steel mills to focus mainly on exports.
From the government's viewpoint, the excessive steel exports are not only harmful to the domestic environment, but also disadvantageous to strengthening the international competitiveness of downstream industries. Due to steel exports, domestic steel prices have remained at a high level, raising the
production costs of downstream industries and affecting their international competitiveness. The government does not want to see this, and therefore implements measures to curb steel exports. For example, the Chinese
shipbuilding industry ranks third in the world. Currently, the international
shipbuilding industry has a brisk demand for
shipbuilding plate and Korean
shipbuilding factories purchase
shipbuilding plate from
China in large quantities. If the government does not control exports, it will be disadvantageous for the Chinese
shipbuilding industry.
In conclusion, it was widely expected that
Baosteel would determine the international
iron ore price for 2007 fiscal year, and the 9.5-percent increase is still within the acceptable range. For the Chinese mills, it may be not a bad thing to see increased
iron ore prices.