According to a leading Indian iron ore exporter, in the negotiations to settle ore prices for the current season, China is literally caught between the devil and the deep blue sea.

In the miners’ eyes, China, which with vengeance has allowed private enterprises to flourish and given considerable space to foreign capital in its economy, betrays hubris when it comes to reaching a consensus on ore prices.

The circumspection of Indian miners when the subject is China is understandable since that country accounts for over 90% of our annual iron ore exports of about 106 million tonnes. Moreover, as China buys ore from India exclusively on spot market rates, the annual benchmark prices have no bearing on the trade in this mineral. In fact, long term contracts come into play for about 3 million tonnes of ore supplied to Japan and South Korea by MMTC and some amounts picked up by the two countries from Goa.

What the unnamed Indian exporter was hinting at was more or less on the same lines as the observation of Australian trade minister Mr Simon Crean that “We recognise China market economy status; all we ask in return is that it acts in accordance with market principles.”

The world leading iron ore producers have not liked the government inspired Chinese moves to bring the country major portion of steel capacity under one roof to negotiate prices. The importance of China with a share of about 75% of the world import of iron ore for mining groups such as Brazilian Vale and Anglo Australian BHP Billiton and Rio Tinto is understandable.

Not many seasons ago, China came to replace Japan to conduct annual iron ore benchmark price negotiations with leading miners. This is as it should be. But last year due to the refusal of China Iron and Steel Association which took upon itself the task of conducting negotiations on behalf of that country steelmakers, to see the miners’ point of view on prices at all it could never close the negotiations. Exasperated by CISA stand, not only did Japanese and South Korean steel groups and ArcelorMittal reached agreements with miners independently, but quite a few Chinese steelmakers thought it wise to make deals on their own.

In the process in China itself, the negotiating skills of CISA came into question. But China has not given up the idea of going to the negotiating table with one agency representing the country’s steel industry to get a better deal.

There are two suggestions to replace CISA as the negotiating agency.

1. Let a new government organisation be created on the lines of Chinese metallurgy ministry with a charter to hold price negotiations with the miners, arrange imports and then distribute the imported ore.

2. To get the state-owned steel companies to promote an iron ore import company with the mandate to negotiate ore prices and organise imports.

Industry officials here watching the China scene say, while all the talk surrounding the ideal agency to handle negotiations will have little or no relevance for this season ore prices, the suggestion relating to creating a government organisation is finding support among steelmakers. Private players, however, have some serious reservations about government steel units sponsoring an agency to deal with miners and organise imports. Irrespective of the way the die gets cast, many in the Chinese government and industry have come to believe that the country, which must increasingly depend on iron ore imports to sustain a capacity of 700 million tonnes and still growing rapidly, should seek out ore supply options beyond Australia and Brazil.

Mr RK Sharma director general of Federation of Indian Mineral Industries said “This creates an opportunity for us and I don’t think the long term interest of our growing steel industry will be compromised in any way by our attempts to get a bigger share of the ore fines sea borne trade involving China.”

China could draw comfort from the uncharacteristically strong reaction of the World Steel Association to Vale and BHP extracting 90% price hike for the steel making ingredient through short term contracts. But China is not ready to let go of the annual benchmark pricing system.

(Sourced from Business Standard)