On June 11, the China Iron and Steel Association (CISA) threatened that China was ready to cut its steel output and drop the annual iron ore talks, toughening its position in rejection of the benchmark iron ore contract price deal accepted by Asian rivals.
In an interview with the official China Securities Journal, CISA general secretary Shan Shanghua said, "China will not make concessions in the talks. China is ready for a breakdown of the talks. In the event of a supply shortage of iron ore, Chinese steel producers would rather cut output." Thus, if the Chinese mills fail to obtain bigger price cuts, they will take the risk of relying on the uncertain spot market.
Due to public pressure, the iron ore talks led by the CISA seem to be swayed by emotion rather than business calculations. Although there is not so much difference between the 33 percent cut agreed by the iron ore producers and several major Asian steelmakers and the 40 percent cut targeted by the Chinese, it is not expected that the CISA will be able to bear the pressure of failing to achieve its target.
The China General Administration of Customs data indicate that China imported 53.46 million mt of iron ore in May, down six percent from a record 57 million mt in April.
According to analysts, the CISA is currently considering controlling steel output as well as curbing iron ore imports, and reducing iron ore inventories at the ports. At present, China's finished steel inventory is at a relatively high level, and due to the sufficient capital flow of mills and traders the market is not likely to decline in the short term. In this context it may be possible to control steel output.
The high volume of iron ore imports into China this year have mainly been due to mass imports made by some speculative importers. In the January-April period this year, iron ore imports made by Chinese mills have decreased by 4 million mt year on year, while traders' iron ore imports are up by 39 million mt, also compared to the same period last year. The CISA considers that it is essential to reduce the number of iron ore importers in order to curb iron ore imports.
According to Chinese traders, the most effective way of reducing iron ore imports would to cancel the import qualifications or licenses of other importers except China's Minmetals and Sinosteel. According to the Chinese mills, a small number of mills should be allowed to import directly and all other mills would have to buy from Minmetals and Sinosteel. Minmetals and Sinosteel would only be able to charge a small commission fee and would not be able to make a profit.
Mr. Shan's statement has come after Asian mills recently agreed with Brazil's Vale on a 28.2 percent price cut for iron ore fines and on a 44.47 percent cut in the lump price as compared to the 2008 benchmark prices, falling significantly short of the reduction China is insisting upon.
Following the tough stance enunciated by the CISA today, some rumors has arisen claiming that Australian miner BHP Billiton and Japanese steelmaker JFE Holdings Inc. have concluded their 2009 iron ore price talks, agreeing on the same 32.95 percent reduction for fines and 44.47 percent cut for lumps previously settled with Rio Tinto, citing unnamed sources close to the talks.
However, BHP Billiton has declined to comment, saying that it will only release information on its iron ore settlements only when agreements are reached. While JFE Steel cannot be reached for comment, Nippon Steel just said it was still in talks.