The ongoing 2008 international iron ore negotiations between Chinese steelmakers and the top three iron ore suppliers have been suspended. Although all parties involved declined to issue confirmation, the huge price gap between the iron ore buyers and sellers, and also serious conflicts of interest, have made it hard for both sides to move forward even by small degrees for the time being.
As the Chinese steelmakers' representative, Baosteel's top official stated publicly that the iron ore price for 2008 had not been discussed at the negotiations so far. However, according to the latest indications leaked from inside Baosteel, the current barrier facing the Chinese steelmakers and the three main supplies is just a 20 percent price difference. The Chinese steelmakers are said to have put forward a 30 percent price hike compared to the 2007 price level in the early phase of negotiations. However, the sellers are targeting a 50 percent hike and have maintained this target up to now.
Currently, the Chinese steelmakers are adopting a less active stance than before and are prepared to bide their time. The major reasons for this change are the developments seen in the international iron ore market.
Since early December 2007, the shipping freight rate of iron ore both from Brazil and West Australia to China has experienced a continuous decline. The average Brazil-China iron ore shipping freight was about US$ 91.5/ton (150 thousand DWT ship) on December 1 2007. At present, this figure is about US$55/ton, down nearly 40 percent. Meanwhile, the freight rate for West Australia-China has dropped from US$38.5/ton down to US$ 19.7/ton, down 49 percent, over the same period. And this trend is still continuing. Australia-based BHP is strongly in favor of discussing the 2008 iron ore price on CFR basis instead of the current FOB basis, in order to increase profits from the high shipping freight rates. However, the more recent situation of declining freight rates favors the position of the Chinese steelmakers.
Furthermore, the Chinese domestic spot prices for iron ore are indicating a decrease trend at the moment. It is thought that two major factors are behind this downward movement: firstly, the domestic iron ore mining capacity and the significant new discoveries of local iron ore mines are meeting the huge local demand for iron ore to a greater degree. Secondly, China's tightening of its monetary policy and the rises in the loan interest rates are forcing some local iron ore importers to sell their stocked iron ore in order to retrieve their cash in time.
Furthermore, some unconfirmed rumors have even said that Chinese steelmakers are expecting that the potential worldwide economic depression deriving from the troubles in US subprime mortgage market would be in favor of the iron ore buyers. However, this is a pure rumor, since world demand for steel would also decline and Chinese steelmakers' resulting losses would be greater than the gain they would make from the comparatively cheap price of iron ore.
Although Chinese steelmakers face a difficult task as they strive for a good iron ore price, they are also seeking the best price balance for both parties under the current circumstances. It is estimated that this point of balance will in the end lie somewhere between 30 percent and 50 percent. If so, its will only be possible to cover the added costs by means of the lower shipping freight rates and the further appreciation of the RMB.