Beijing cools tone on ore supply talks
China appears to be toning down its demands before key iron ore negotiations to agree a benchmark price with miners.
The China Iron and Steel Association (CISA) told a press briefing in Beijing yesterday that it expected to see a moderate rise in iron ore price next year.
This contrasts with comments at industry conferences last month when it was demanding a cut in the benchmark price agreed with the three main suppliers - BHP Billiton, Rio Tinto and Vale.
CISA general secretary Shan Shanghua told a conference in Qingdao last month that it was unreasonable for suppliers to ask for higher prices as China would have an oversupply of iron ore next year, and complained of the oversupply of steel that was causing low profitability and losses for the country's steel mills.
CISA vice-chairman Luo Bingsheng said yesterday iron ore discussions were due to start soon with the miners.
Attempts to agree a benchmark price this year failed with CISA, which led the negotiations, demanding a 45 per cent reduction on last year's price, with the miners agreeing only to the 33 per cent discount agreed with Japan, South Korea and Taiwan.
As a result, most iron ore transactions in China this year have been done at spot market prices, which on occasions soared 80 per cent higher than the Japanese benchmark price. CISA has been under pressure from Chinese steel mills for not agreeing to the lower price.
In recent months, CISA has been demanding a special price for China since it is the world's biggest importer of iron ore.
Tensions between the two sides increased following the arrest of Stern Hu, Rio's chief negotiator, along with three other employees for alleged bribery.
Following the breakdown in talks, there has been considerable speculation as to whether it will be possible to negotiate a benchmark price for next year.
Analysts said there was now an element of 'face' associated with the talks on the part of the Chinese.
However, in recent weeks, there has been a noticeable lowering in temperature between the two sides. Last week's visit to Sydney by Vice-Premier Li Keqiang was clearly an indication that diplomatic relations had been patched up.
Rio senior executives have said publicly they want to improve relations with China. Nevertheless, Rio chairman Sam Walsh said recently that while there might be a different mechanism for arriving at a price for China, it would have to be fair to buyers elsewhere.
Analysts have pointed out that despite being a big importer, China is not in a strong bargaining position since demand outweighs supply.
China's iron ore imports rose 36 per cent to 469.4 million tonnes in the first nine months of this year, hitting record levels in September. This strong demand was in turn driven by the country's record steel output in August and September, boosted by its four trillion yuan (HK$4.54 trillion) stimulus package.
Analyst estimates for next year's benchmark price for iron ore vary widely, from no change to as much as a 35 per cent increase.
In addition to forecasting levels of demand for iron ore in China, a further factor has been the strengthening of the Australian dollar, which has risen 32 per cent since April 1 when this year's contract price started.
Analysts say the benchmark price would need to rise about 20 per cent just to maintain parity. This is bound to cause China's negotiators some discomfort.
Steel body demanded special price as the world's biggest user
The level above spot prices at which the mainland sometimes bought iron ore: 80%