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| China may have its way in fixing ore prices | | ANALYST`S VIEW |
| Kunal Bose / Mumbai Dec 15, 2008, 00:22 IST |
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China never took it well that the world’s three big miners extracted hefty price rises for iron ore in the past few years. Now, it is going to give it back to Brazil’s Vale and Anglo-Australian BHP Billiton and Rio Tinto.
The first salvo, which China fired as ore price negotiations for the season starting April 2009 began last week, must have wracked the nerves of the triumvirate of miners. What happens in closed-door meetings can only be guessed. But this time, the world’s biggest importer and user of the mineral has thought it appropriate to use the China Iron and Steel Association (CISA) to let everyone know what precisely it is aiming to achieve in the next season.
CISA secretary general Shan Shanghua is saying the overriding consideration while fixing iron ore prices for 2009-10 should be the recent rapid emasculation of the world steel mill industry. His argument is that since steel prices have sunk to 1994-levels in the wake of global financial crisis and demand fall, iron ore prices should be calibrated accordingly.
The argument that ore prices should stay in alignment with steel prices is unarguable. As 1.6 unit of ore will be used for making one unit of steel, the mineral is the single biggest element in the metal’s production cost. Incidentally, the benchmark grade iron ore contract price has advanced from $24.40 a tonne in 1994 to over $90 a tonne now.
Whatever be the current season’s contract prices, which were fixed when steel was moving from one high to the next, Chinese importers, as secretary general of Federation of Indian Mineral Industries R K Sharma says, are now buying fines from us at spot prices ranging from “$50 to $60 a tonne”.
At this stage, no one will risk forecasting where iron ore spot prices will be a quarter or two hence as steel mills everywhere are cutting production so that inventories at their end don’t rise. Rana Som, chairman of India’s largest iron ore producer NMDC, makes an understatement as he says, “There is no possibility of the mineral prices going up.”
In fact, after having raised the contract rates in October to close the gap between the world and domestic prices, NMDC will now decide to what extent it must now roll back the mineral prices. Even while the local steel industry has not given up the campaign to stop exports of iron ore, the government, taking into account the slumping world prices, has removed the export duty on fines and cut it to 5 per cent ad valorem for ore lumps.
China, which over the last few years has been stepping up ore procurement from here to reduce its dependence on the likes of Vale, BHP and Rio, took exception when New Delhi, responding to the pleas of steel makers, brought all varieties of the mineral within a punishing export duty net. Sharma is confident China will step up ore procurement here after months of lull, now that we have done away with duty on ore fine exports.
The importance of China for our iron ore sector is underpinned by the fact that of our total exports of 104.27 million tonnes in 2007-08, our neighbour’s share was as much as 88 per cent. Moreover, China largely buys fines from here for which there is still little local use in the absence of sufficient pelletisation capacity.
As China produced 489 million tonnes of crude steel last year, it had to import about 380 million tonnes of ore to supplement domestic raisings. At the beginning of this year, the forecast was Chinese ore import requirements will rise to 410 million tonnes. This, however, may not be the case as many Chinese mills have cut production in response to shrinking demand for steel, particularly from building construction and auto sectors.
Significantly, China had the biggest share of the international iron trade of 822 million tonnes in 2007, a rise of 8.1 per cent over 2006. And this will remain unchanged in future.
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