China Accepts Defeat On Iron Pricing?

By Kishori Krishnan Exclusive To Iron Investing News

The Chinese have blinked first on the 2009 iron ore pricing issue. Quietly accepting defeat, China’s biggest steelmakers have largely given up trying to wring discounts on iron-ore purchases this year and are now concentrating on next year’s contract-price talks, according to media reports.

China, by far the biggest user of imported iron ore, has tried for months to leverage its size and growing influence to muscle miners Rio Tinto (RTP),  BHP Billiton Ltd (BHP) and Brazil’s Vale SA (VALE) into lowering their prices for iron ore, used as the chief ingredient in the production of steel.

Though China produces more steel than any other country, it doesn’t have enough natural iron ore and needs to import it from Australia, Brazil and India. The mining companies sell the iron ore, and each year the two sides hammer out a contract for prices and quantities.

However, the world’s strengthening economy and China’s increasing demand for steel under its economic stimulus program has worked against the push for lower-priced iron ore.

Acquisitions galore

To feed its hunger, Goldman Sachs JBWere Pty’s Paul Gray has said that China is set to double the proportion of domestic iron-ore demand supplied by Chinese-owned mining assets abroad to about 20 per cent in five years as the country’s steelmakers step up acquisitions.

China currently buys about 10 per cent of its iron-ore from mines owned by Chinese steelmakers in other countries, Gray, a London-based analyst with the Goldman unit, told mining industrialists in Belo Horizonte, Brazil, that the country’s steel producers, which hold iron-ore assets in Australia, are seeking acquisitions in Africa, Mongolia, Kazakhstan and Afghanistan.

Chinese imports account for about 70 per cent of global seaborne iron-ore shipments. Total seaborne supplies may grow 5 per cent this year to about 860 million metric tons as Chinese crude-steel output rises 8 per cent.

Richard Court, the Australia-based chairman of mineral research company GRD Minproc Ltd, said Chinese investments to prospect for minerals in Africa grew to $1.6 billion in 2007, from $500 million in 2006.

Hungry giant

China’s ravenous appetite for iron ore will continue for years to come as development spreads across its territory. Commodities markets are sharply focused on Chinese demand for raw materials, as the populous Asian giant’s economy was one of the few to remain in growth throughout the global financial crisis.

China has already been investing to stimulate iron ore production in areas away from its main suppliers to swing the demand and supply balance in its favor and give it more clout in negotiating prices in annually revised supply contracts.

Analysts maintain that there is no doubt that China will continue its policy of acquiring overseas assets and is likely to venture into areas perceived as higher risk, such as Africa and parts of Central Asia.

Eyeing Australia

The state-owned parent of Chongqing Iron and Steel Co Ltd (1053.HK), a medium-sized Chinese steelmaker, is in talks to acquire an Australian iron ore project which had prospective reserves of 3 billion tonnes, the government-run Chongqing Evening News reported.

Chinese steel mills have been encouraged by Beijing to acquire overseas ore mining assets to reduce their reliance on major suppliers such as Brazil’s Vale (VALE5.SA), Australia’s Rio Tinto (RIO.AX) and BHP Billiton (BHP.AX).

Chongqing Steel imports 4 million tons of iron ore a year from Australia and Brazil. The company plans to acquire 3 billion tonnes of iron ore from Australia.

However, Australia does not seem so keen and on Thursday rejected two proposed Chinese investments in its mining industry, straining Sino-Australian relations at a time when resource-hungry China is keen to extend its footprint in Australia’s mining sector.

Corporate news

China’s No. 2 steelmaker has cut its rebar price by 10 per cent and has also made sizeable cuts in hot-cold rolled steel prices.

China’s Hebei Iron and Steel Group, the world’s fourth-biggest steelmaker, cut the price of reinforcing bar used in building construction by 10 per cent, as excess supply weighs on the market.

The price cut could further weaken the physical Chinese steel market, which has seen a fall of around 20 per cent since early August, as steadily recovering demand lags a more rapid rise in supply, traders and analysts said.

Metallurgical Corporation of China Ltd fell 12 per cent on the first day of trading in Hong Kong, the city’s weakest debut this year, on concern government efforts to curb industrial overcapacity may limit profit growth.

The state-owned construction company dropped to close at HK$5.61 from the HK$6.35 offer price, after raising HK$18.2 billion ($2.3 billion) in Hong Kong’s biggest initial public offering for 18 months.

China Metallurgical, which builds steel mills and helped construct Beijing’s `Bird’s Nest’ Olympic stadium, sold shares at the lower end of its indicated range after China’s cabinet said it would rein in oversupply of steel and cement. The company will use the proceeds to expand its mine building business overseas.

Australia-based Cazaly Resources has sold off a parcel of gold tenements and accelerated its iron ore interests after posting a US$5.3 million annual loss. The company today firmed its iron ore assets after making a share placement with a Chinese steel supply company.

It will receive up to US$4 million with the placement of 10 million shares at 40c each, plus 5 million free options, to aid development of the Parker Range iron ore project. Some of the funds will also go to working capital for its other iron ore activities.

The junior iron ore and gold explorer’s loss for the 12 months to June 30 2009, was US$5.29 million compared to a net profit of US$1.53 million for the previous financial year.