Angang chief slams mining oligopoly

PUBLISHED : Thursday, 22 April, 2010, 12:00am
UPDATED : Thursday, 22 April, 2010, 12:00am

The chief of Angang Steel, the largest Hong Kong-listed mainland steel producer, has blasted the three foreign iron ore mining majors for not being willing to 'share' market risks and profits, leaving half the mainland's steel industry in the red while making huge profits themselves.

Company chairman Zhang Xiaogang, who is also the head of the China Iron and Steel Association which represents steel mills in ongoing negotiations with foreign suppliers, criticised Brazil's Vale and Australia's Rio Tinto and BHP Billiton for not looking after the interests of their long-term customers.

'Ideally, BHP, Rio and Vale should focus on doing their mining business well while we, the mills, concentrate on steel production; we should work together, share profits and market risks,' he said.

'Now their costs are very low and profits are very high, while half of China's steel mills were losing money last year.

'This is a result of their oligopolistic behaviour, so our steel mills have to go abroad to obtain their own iron ore. This is not normal.'

His comments came as talks between the iron ore trio, which together supply two-thirds of the world's seaborne iron ore, and mainland mills remained deadlocked.

Since late last month, the trio have separately announced that they were shifting to quarterly pricing, away from the decades-old annual pricing system.

Vale and BHP had said most of their contracts were signed on a quarterly pricing, which has put pressure on mainland steel mills to give in to the new system.

The move reflects the desire of the suppliers to maximise short-term gains from the mainland's surging demand for the steel-making material. However, they would also be taking the downside risk if demand falters.

Under the old system, volatility in iron ore prices and hence profitability of both the suppliers and buyers was smoothed out by annual pricing.

The mainland is the world's largest iron ore importer requiring 630 million tonnes last year, or just over two-thirds of the global seaborne shipments. With over 800 steel mills, the industry has, despite an economic recovery, suffered from poor profits due to rising material prices, global protectionism, oversupply and slow industry consolidation.

Angang on Tuesday posted a net profit of 752 million yuan (HK$818.64 million) for last year, 43 per cent below the 1.33 billion yuan average estimate of 25 analysts polled by Thomson Reuters.

Angang plans to raise crude steel output by 10 per cent to 22 million tonnes and steel products by 10 per cent to 21 million tonnes this year.

Company secretary Fu Jihui said although the steel price had risen 20 per cent since December, profit margins remained under pressure in face of the almost doubling in the iron ore price agreed by steel mills overseas on a quarterly basis.

Spot market prices nearly tripled to US$160 a tonne from a year earlier.

Zhang said he expected Angang to achieve some 'breakthrough' on the merger and acquisition front by the end of the year, but he did not elaborate.