It is reported from a domestic newspaper on Friday that the CISA (China Iron and Steel Association) is looking to sign long-term iron ore deals with suppliers outside Australia and Brazil as talks with major miners stay deadlocked.

CISA, China’s chief negotiator in the protracted price talks with Australia’s Rio Tinto and BHP Billiton and Vale of Brazil, is pushing for long-term agreements with miners in India, South Africa and Vietnam, the 21st Century Business Herald said, citing unidentified sources.

More than a month after the traditional June 30 deadline, no breakthrough in the benchmark price talks is yet evident, but smaller Australian miners have already pointed the way forward by striking more flexible agreements with their Chinese customers.

Atlas Mining Ltd said this week it had agreed prices that are based on a negotiated benchmark but can be adjusted should the spot market price rise above or below a certain level.

China, whose steel mills are struggling with overcapacity, has been holding out for a price cut of 40-45 percent, even though Japanese and Korean steelmakers have signed off on a 33 percent reduction.

It is said from CISA last week that it would continue to hold out for a “reasonable” price cut.

According to Luo Bingsheng, executive vice president of the association, China Iron and Steel Association (CISA) will push forward the iron ore import registration system, as an effort to curb the flow of imported iron ores to high polluting enterprises with backward production capacity.

The association’s latest data show that China imported 297 million tons of iron ores during the first half of 2009, up 29.3 percent from a year earlier. Those imported by trading companies reached 131 million tons, accounting for 43.96 percent of the total iron ore imports, higher than 29.83 percent during the first half of 2008.

China has 112 companies qualified for importing iron ores, but actually 152 companies were engaged in such business, according to the association.

According to statistics released by the National Bureau of Statistics, iron ores used in pig iron production increased 21.55 million tons during the year’s first half, while iron ore imports rose by 67.33 million tons. Obviously, the imports were highly above production demand, which led to large iron ore inventory in ports and high demurrage charges and ocean freight.

The large iron ore imports by trading companies has resulted in over imports and distorted the relationship between domestic iron ore supply and demand, and it was disturbing for the on-going iron ore price negotiation.

Luo said that China would strictly implement the iron ore import agency system. At the same time, it would adopt a uniform price in accordance with the negotiation results, to avoid the risk of speculation on different prices for one product.

Luo called on the government to encourage domestic iron ore exploitation, to ensure supply to the domestic market.

As for the highly concerned iron ore price negotiation, Luo said that it was still in progress.

Companhia Vale do Rio Doce, Brazil’s leading metals and mining company, said last Friday that it would not reach any price agreement with China before completion of price negotiation between China and Australia’s BHP Billiton Ltd. and Rio Tinto.

It is announced from BHP Billiton last week that it has reached an annual contract price with clients on 23 percent of its iron ores and a mixed contract price on 30 percent of its iron ores, leaving the rest 47 percent still under price negotiation.

It is determined that CHINA wants all of the country’s steel makers to accept a single ore import price once the price for this year.

The measure aims to regulate excess iron ore imports by small steel makers and intermediary traders, which have hampered ore negotiations by creating unnecessary demand.

The China Iron and Steel Association has proposed an import system to force traders and mills to buy ore at a unified benchmark price agreed with foreign miners, and traders could charge a 3-to-5-percent fee for resale, Luo Bingsheng, vice chairman of the CISA, said yesterday.

The steel industry group said foreign miners are encouraging spot sales to China, leading to excess imports and distorting China’s actual demand. Spot imports account for 83 percent of China’s ore purchase so far this year, it said. The country’s iron ore imports surged 29 percent in the first half, mainly driven by speculative buying from smaller mills and trading companies in recent months.

China’s negotiation position has been hurt by rising spot ore prices, which were below contract prices in May when Japan first accepted the 33-percent cut but have now exceeded them.

The CISA also expects a “reasonable” solution in the protracted iron ore price negotiations with global miners while it blamed speculative trading for hindering the talks.

“We hope to see a reasonable result,” Luo said at a press briefing yesterday in Beijing, adding China is seeking a win-win agreement.

The CISA, China’s lead negotiator this year, is locked in the talks as it demands a deeper cut in term prices after major Japanese and South Korean steel mills accepted a 33-percent reduction offered by Australia’s Rio Tinto, the world’s second-largest iron ore miner.

The talks, originally meant to set prices for the year starting April, had missed a key June 30 deadline, with some Chinese mills already agreeing to a temporary 33-percent cut.

BHP Billiton, the world’s No. 3 ore producer, this week said it has agreed to sell 30 percent of its volume for this year on a combination of quarterly negotiated pricing, spot market and index-based pricing, but only settled 23 percent of volume at annual contract prices.

It is reported that China Iron & Steel Association (CISA) Tuesday denied media reports that it had decided to suspend price negotiations with Australian iron ore giants Rio Tinto and BHP Billiton. It said speculative behaviour in the spot market had led to high price rises, forcing it to suspend the negotiations with Australia’s Rio Tinto and BHP Billiton.

Media reports said Monday that CISA decided to temporarily suspend the on-going iron ore price talks to evade unreasonable interruptions from the spot market where iron ore prices have been distorted.

But CISA refuted the above reports, saying that it never released such a statement and that its talks with Rio Tinto and BHP Billiton are underway.

Xu Zhongbo, a professor of the University of Science & Technology Beijing, noted that the iron ore price talks going on between CISA and Australian iron ore suppliers have entered into the most challenging period. It’s unlikely, said Xu, that any agreement can be produced in the short term.

Steel spot prices both on the domestic and international markets are currently surging, driving up steel production and subsequently iron ore demand.

However, Chinese steel plants may begin cutting output from the fourth quarter due to possibly arisen faltered steel demand, which may favor China in the iron ore price negotiations, Xu added.

It is reported that China steel gloom will be coming. Listed steel mills in China are expected to report either declining profit growth or losses for the first half-year period due to sluggish demand, lower steel prices and over capacity.

Twenty-seven listed steel firms have forecast a less-than-rosy performance in the first-half; with 15 companies forecasting losses and 12 predicting declining profits compared to the same period in 2008.

The 27 steel mills, cumulatively, expected to post a loss of 9.64 billion yuan ($1.41 billion), compared to a profit of 36.3 billion yuan during the same period last year.

Angang Steel, which forecast a loss of up to 2.99 billion yuan, ranked as the top loss-maker among the 27 firms.

The company had reported profits of 5.98 billion yuan during the same period a year earlier, helped by markets hungry for steel thanks to the booming domestic economy. It had also reported a profit of 8 million in the first quarter of 2009, indicating that the performance could worsen in the second quarter.

Besides Angang Steel, Baogang Steel, Panzhihua New Steel & Vanadium Company, Taigang Stainless Steel all reported a loss forecast of over 100 million yuan.

“The Chinese steel industry was in the red for the previous seven months until May,” said Wang Xinguang, a steel industry investment manager at private equity firm Hao Capital. “Two-month profits cannot compensate for the loss in the first half-year.”

Chinese steel mills signed an annual iron ore contract at $93 per ton in 2008, up 78 percent from 2007, but in the latter half of 2008, the economic meltdown shrank steel demand and steel prices plunged. As a result, steel mills now cannot charge more to cover their raw material costs, he said. This factor contributed significantly to the loss forecast, he said.

Fan Haibo, a steel analyst at Beijing-based Xinda Securities, said most listed steel firms produced high value-added steel products such as plates, which were usually not in high demand during a downturn.

Small private steel firms produced construction material like deformed steel bars and were more profitable than listed steel mills, he said.

It is reported by the China Iron and Steel Association that China’s steel demand was picking up steadily, driven by the recovery of the manufacturing and property sectors.

It is said yesterday by a key official with the steel industry lobby that China would rather give up on annual negotiations for iron ore pricing contracts than accept the 33-percent cut proposal. The official also confirmed that the latest round of talks would see some progress within the next 10 days.

“CISA has put the foot down and will not compromise on its stance. You will see the result in around 10 days,” Li Xiaowei, vice-chairman of the China Iron and Steel Association (CISA) and chairman of the State-owned Hunan Valin Iron & Steel Group, said.

“We will ask for a better rate, otherwise we would rather give up on the annual negotiations for iron ore pricing,” he told China Daily at an Australia-China investment forum.

“Supply and demand rely on each other like teeth and lips. Those who only chase monopoly and windfalls will eventually lose more,” Dow Jones also quoted Li as telling reporters on the sidelines of the forum.

China, as the world’s largest iron ore buyer, needed 450 million tons of iron ore annually, and should have the right to decide its price, he said.

Chinese media reported earlier that some major steel mills, including Baosteel and Hebei Iron and Steel Group, had agreed with Rio Tinto and BHP Billiton on a 33-percent cut in iron ore prices.

Li Qingyu, general manager of Baosteel Resources Co, said he was not informed about the deal, adding iron ore supply exceeded current demand.

CISA rejected a 33-percent price reduction that Japanese and South Korean mills agreed to in May, and held out for a 40-percent cut.

The negotiations, which missed their June 30 deadline, became more uncertain after four employees of Rio Tinto were detained on charges of espionage just a few weeks earlier.
Steel analysts too believed CISA’s stance was not pragmatic.

“After Japanese and Korean mills, even some Chinese steel mills have accepted the 33-percent discount. China’s bargaining chips are falling,” said Yan Song, a steel industry investment manager at Hao Capital.

He said China’s steel industry was disadvantaged in annual iron ore negotiations due its low industry concentration.

The output of the top 10 Chinese steel mills stood at only 30 percent of its total steel output while the three global giant miners accounted for 70 percent of global iron ore trading.

Since the prices of iron ore and shipment are fluctuating, and are most likely to go up, steel mills will see fluctuating profits. If China gives up on the negotiations and turns to the spot market, the profits of steel mills may fall. According to Metal Bulletin prices, the iron ore spot price rose 4.6 percent to $91 a ton last week, the highest since October last year.