China Agrees To 19% Iron Ore Price Hike

Although angry about the result, China finally agreed to a 19% iron ore price hike from the world's three big miners. China lashed out June 21 at "flawed" negotiations which ignored its interests and simply forced it to fall into line and pay more. The agreements end months of deadlock between China, the world's biggest consumer of iron ore, and the three producers who account for about 75% of global supplies.

Anglo-Australian mining giants Rio Tinto and BHP Billiton said they had secured an 19% price rise from Baosteel, China's largest steel producer which represented all the Chinese mills in the talks. The official Xinhua news agency said Baosteel closed out a similar deal with Brazil's Companhia Vale do Rio Doce, the third major producer, with the Chinese side to formally announce all the accords shortly.

China had been determined to secure a much lower price but, after talks dragged on past an April 1 deadline, other steel producers around the globe signed contracts agreeing to pay 19% more than last year. "Many steel producers around the world had agreed to the price hike, severely undercutting the Chinese bargaining position," Xinhua said.

The Chinese steel firms had counted on their market weight to set the benchmark price this year -- reportedly pushing for no price hikes and then a rise of only 10%. It was a move that showed up Chinese misjudgements over its influence in the market, said Danny Chen, associate director of Fitch's corporate ratings team in Beijing."This hard-fought agreement shows that China, the market giant, hasn't benefited from increased bargaining power as it is still undergoing the transformation from the biggest market player to the strongest one," said Chen. During the negotiations China occasionally resorted to hardball tactics, with the government in March threatening to implement price caps on ore imports if there was no deal. Sharp criticism abroad about such a stance being against global trade rules promptly forced Beijing to back off.

The fate of the Chinese steel mills was ultimately sealed in mid-May when Germany's largest steelmaker, ThyssenKrupp AG, broke ranks and signed a 19% increase with Companhia Vale do Rio Doce. With the benchmark set, other major steelmakers including those in Japan quickly followed suit in signing deals with the big three suppliers.

Jose Carlos Martins, executive director of the iron ore division at Companhia Vale do Rio Doce, said last week that Chinese steelmakers had the potential to become global price-setters but still had a thing or two to learn. "Their perception has to be more related to the world market because iron ore is a global market, it is not only China, it is global. And they have to be faster in their decision-making process."

Copyright Agence France-Presse, 2006

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