Interfax China quoted a senior official with the China Iron and Steel Association as saying that it is unlikely that the use of long term iron ore contracts will be reintroduced.

A number of reports in China's state controlled media have speculated that the CISA is pressing for the resumption of an annual iron ore pricing system after it announced on October 29 that it launched a new round of negotiations with global iron ore suppliers concerning next year's purchases.

Mr Chi Jingdong vice secretary general of CISA said that “While the main topic to be addressed at the talks will be the iron ore pricing mechanism used by China's steel mills and global iron ore miners, the miners are resolutely sticking to the new pricing model which is based on a quarterly system. Which pricing mechanism is used and the index price are matters that should be discussed together in formal talks and not solely decided upon by iron ore suppliers.”

Mr CHI said that “While iron ore miners are enjoying huge profits, the majority of China's steel mills are struggling. Steel product profit margins are now incredibly low, standing at between only CNY 30 and CNY 50 per tonne. Around 50% of China's mills are barely making any profit. We do not want a system that is biased toward China, nor do we want a system that solely benefits the interests of global miners instead we hope to develop a long term and sustainable relationship that is beneficial to both sides.”

He pointed out that if China's steel mills are forced to close there will be no market for iron ore suppliers. China imported 457.6 million tonnes of iron ore in the first nine months of 2010, a decrease of 11.53 million tonnes from the same period of last year. Increasing domestic production of the raw material and the expectation of a static crude steel output level in the future will see such imports maintain their current level during the period of the twelfth Five Year Plan (2011 - 2015) or even drop.

According to Umetal statistics, China produced around 780 million tonnes of iron ore in the first nine months of 2010 an increase of 25.9% YoY. While increasing industrialization and urbanization in China means the market is anticipating a strong domestic demand for steel products, it is not strong enough to support such high iron ore prices.

(Sourced from Interfax China)