The tough 2008 iron ore price negotiations between the Chinese steelmakers and Australian iron ore magnates are still continuing. Although both parties have refused to budge from their respective positions in particular regarding the freight premium issue, the latest indications are that China's position in the negotiations has strengthened somewhat and that the talks may now be moving in the direction sought by the Chinese steelmakers.
Certain recent developments may accounted for the abovementioned tendency at the ongoing iron ore talks.
Firstly, the Chinese imported iron ore market is now cooling down. Influenced by the 65 percent hike in iron ore prices for 2008, the CIF price of imported iron ore at China's major ports continued to rise during the first two months of 2008. However, this trend came to a halt in March. Due to the considerably increased steelmaking costs deriving from the hikes in iron ore and coke and also from the tight national fiscal policy, the speed of steel in China production has lagged behind the rate of iron ore importation, and the resulting imported iron ore surplus has affected the market equilibrium. In consequence, the monthly average CIF price for imported iron ore has dropped from $129/mt into $125/mt in March. This trend is still continuing in April.
By the end of March, China's surplus of imported iron ore was estimated at over 10 million tons. Currently, the nationwide inventory of imported iron ore stands at over 60 million tons. The high steel prices are having a restraining effect on demand for steel products and, as a result, the reduced steel production has led to the current low trading volume of iron ore. Due to cash supply pressure and pessimistic expectations, some iron ore traders have started to reduce their inventory at comparatively low prices in order to avoid risks.
Secondly, some reports claim that rising Australian iron ore star Fortescue Metals Group (FMG) is ready to stretch out a helping hand to the Chinese steelmakers, a move which would weaken China's dependence on the two main Australian iron ore giants, BHP and Rio Tinto.
FMG is currently ranked number three in Australia, behind its two abovementioned compatriots. It is reported that the company has expressed a strong willingness to cooperate with the Chinese steelmakers, both in actual business and as regards finance, in order to guarantee sales. According to rough estimates, FMG holds over 15 billion tons of iron ore reserves within its mining area. Lately, FMG's success in a crucial arbitration in Australia has entitled it to mine and deliver iron ore reserves located close to BHP's rail network, and has also forced BHP and Rio Tinto to open up their infrastructure. As a result, these two magnates' long-standing monopoly on iron ore could be diminished somewhat and FMG's iron ore may be loaded and shipped to China in greater quantities in the near future.
In fact, in 2006 FMG invited a 20 percent investment from a Chinese steelmaker but backed off because the Chinese side was seeking a majority share. Today, it is believed that Chinese steelmakers would probably be willing to accept a minority shareholding in FMG. So far, Baosteel is seen as the leading candidate in such a collaboration with FMG. Indeed, a few years ago, these two parties jointly invested in a new company to mine magnetite with more than one billion tons of reserves in Western Australia.
So far, FMG has signed long-term agreements with over 30 Chinese steelmakers involving over 100 million tons of iron ore each year. The first shipment of FMG's iron ore is likely to be shipped to China in May 2009. Currently, China's annual iron ore imports stand at around 400 million tons and FMG has announced that its output target is 100-200 million tons within two to three years. Its expected huge output and sales in the future urges FMG to come to China to seek long-term cooperation. FMG's stance towards China may weigh in favor of the Chinese steelmakers in the ongoing negotiations.