China rejects iron ore deal; benchmark in doubt More cos shift to market pricing that will allow them to hedge costs

Print this page Posted on : 05-28-2009 by recycleinme.com

Chinese mills may adopt a hybrid system, which could, for example, allow them to take a bigger 40 per cent cut, but if the spot market moves above a certain threshold, the discount is reduced.

Reuters

Shanghai/Seoul, May 27

China rejected on Wednesday a 33 per cent cut in iron ore prices agreed a day ago by Japanese steelmakers, while No.4 global mill POSCO prepared to accept the deal, highlighting the growing schism that has emerged in a single benchmark system.

Rising strain

While both moves were widely expected, they emphasise the rising strain on the iron ore market's 40-year-old annual pricing system, which has begun to fray as more Chinese mills and big miners tentatively embrace a shift toward market pricing that would better reflect fundamentals and allow them to hedge costs.

China's insistence on a big cut of more than 40 per cent - effectively reversing last year's surge after six years of gains - threatens to scupper the system, which would normally dictate that Tuesday's deal between Rio Tinto and Nippon Steel sets the basis price for the global industry.

South Korea's POSCO will accept the same deal, sources said on Wednesday, following its Japanese peers as is the usual practice, but undercutting Chinese steelmakers who are looking for allies to hold out for cheaper rates.

The focus is now on whether China - whose iron ore imports have more than quadrupled since 2002, when prices rose by almost the same - holds the line at the risk of being forced to buy its imports on the spot market, or strikes a compromise that leaves the annual benchmark system intact for another year.

Plans to negotiate

An industry source said the China Iron and Steel Association, the industry group that represents the country's major mills, will issue a statement on the rejection as soon as Wednesday and say it plans to continue negotiating.

The chief executive of BHP, which has led miners' move to switch to the spot market, on Wednesday appeared to be ready to offer a compromise, saying China's demand may not be sustainable and the picture for global demand was also unclear.

CHEAPER ON THE SPOT

China is now weighing whether it is better to accept the deal to secure stable long-term supply of iron ore or switch to spot markets which offer better pricing to benchmark deals, sacrificing the supply security that underpins annual deals.

Chinese mills may adopt a hybrid system, which could, for example, allow them to take a bigger 40 per cent cut, but if the spot market moves above a certain threshold the discount is reduced.

Source : Business Line