Great changes under way in China's import iron ore market

In recent years, more and more iron ore has been imported to China due to local huge demand for steel. But a healthy and ordered market of iron ore did not appear as expected; on the contrary, disorders and speculations flooded this market. In consequence, many negative influences were brought on the development of steel industry in China. In fact, massive unordered imports of iron ore partially accounted for the bitter 19% price of iron ore in 2006 that was accepted by China's steel mills unwillingly. Major problems of China's iron ore import market are concentrated on two points: Firstly, numbers of inordinate imports stimulated purchasing price to increase. In China, there were too many qualified importers who were authorized by government to import iron ore. Once, their number was over 500. For their own interests, they caused import disorders and partially made intensive situations of demand for iron ore. As a result, China's spot price of imported iron ore was dragged to a high level, especially in 2005. Secondly, high-level stocks of imported iron ore did great harms to the stable market. Though the number of authorized importers has decreased to 99 so far under the control of government, the inventory level of imported ore is still high. Currently, about 43 million tons iron ore is stocked in warehouses at main Chinese ports and this figure is still going upwards. Most of these stocks were imported by international spot transactions. Actually, over a half of imported iron ore is bought by spot transactions in China. It's widely known that the ore price in spot transaction is normally 30 percent higher than that in long-term contract. In addition, many importers bought large amounts of iron ore for speculation purposes. Under such circumstances, ore price can easily be driven up artificially and the market risk level is high. To resolve the problems mentioned afore, government is planning with related associations to impose rules to manage the market. Though the details of these rules have not yet been issued, according to comprehensive analysis and interior messages, main contents are likely to be: 1. Authorized by government, all ore related associations will take up more responsibilities to create a healthy and stable iron ore import market. 2. By harsh policies, government requires most iron ore imports to be under long-term contracts and to strictly restrict spot transactions. 3. The total number of qualified iron ore importers will decrease again. In the end, the importing rights perhaps will be controlled by only a few departments, such as China Commerce Department, important associations, big steel mills, and big traders with special background. 4. Importing agent system will be established. Ore traders in China will be prohibited to gain profits by price margin. Instead, their income will just come from agent commissions. 5. Storage period of imported iron ore at Chinese ports will be shortened to one month or so. At present, iron ore is permitted to stock at port for at most 2 months. This rule aims at stimulating rapid deals and release market risk of speculations.