On December 21,
Baosteel reached an unexpectedly early settlement with Brazilian mining giant CVRD regarding the international
iron ore price for 2007. The agreed new price level will be 9.5 percent up on the 2006 price. This increase margin is within the range that had been expected by the market. According to the forecasts of the major investment and economic institutes, the price hike margin was put at between five to 15 percent.
The market's main focus of interest and surprise following this round of price talks centers around how the parties managed to conclude the negotiating process so quickly? It was widely expected the end-date of this round of talks, however early, would be sometime in the year 2007. In fact, it only took about one month to complete the negotiations from the time that they started. The main answers to the above question may be presented as follows:
China's desire to be the price maker for the first time ever
In spite of its position as the biggest steel making and steel consuming country in the world, and also the biggest importer of
iron ore,
China had never before played the role of price maker in the international
iron ore trade. The country's low standing, relatively speaking, in the international market has been a source of resentment and embarrassment to
China. Especially after the 71.5 percent price hike in 2005,
China faced unprecedented internal pressure to stake its claim for a more important role at the annual
iron ore price talks. The best and simplest way to reach this goal was to settle the new price with one of the world's major
iron ore suppliers, though this involved the risk of being forced to accept a higher price than otherwise would be the case. As
China's representative at the talks,
Baosteel was this time well-prepared to achieve the desired result.
Outside pressure from Asian neighbors
To achieve the pricing they wanted, and also to claim the price making role for themselves, another two steel giants – Nippon Steel and POSCO - had issued joint statements in mid-December in preparation for the 2007 price talks. In addition, Nippon Steel subsequently concluded new cooperation agreements on co-investment and related logistics with CVRD. The steps taken by these two Asian steelmakers indicated that they wanted to be the Asian
iron ore price makers in place of Chinese rival
Baosteel. This external pressure on
Baosteel urged the Chinese producer to accelerate the pace of the price talks.
Price hike margin meets Baosteel's expectations
According to internal sources, when
China's representatives were preparing for this round of talks, their most optimistic target was put at around 0-5 percent, while they set themselves a worst-case range of around 10-15 percent. The agreed 9.5 percent hike is within the expectations. Thus, when
Baosteel and CVRD both expressed satisfaction with the hike of 9.5 percent,
Baosteel decided to finish the negotiation immediately, without any hesitation.
Furthermore, due to the expected continuous appreciation of the RMB is in favor of
China's
iron ore importers, the practical price hike margin will probably be lower than the agreed level. Moreover, it was also inevitable that
China would eventually be the new price maker in the world
iron ore market. For this reason, it is also a smart tactic on the part of CVRD to settle the new price with
Baosteel. Otherwise, CVRD would most likely be replaced by other ore suppliers and would end up losing its pricing right.
Due to the above reasons and others,
China has become the price maker in the international
iron ore trade for the first time ever in such a short time.