Chinese Steelmakers Still Want Long-Term Prices

Producers Yet To Agree To Quarterly Pricing

Chinese steelmakers say they have yet to agree to move to a short-term pricing mechanism for their iron ore supplies, despite steelmakers in other Asian countries agreeing to quarterly contracts.

Earlier this week, both BHP Billiton and Vale announced that major steelmakers in Japan and Korea had agreed to move to shorter-term contracts for the April to June quarter, based on prices in the sport market. Previously, prices were agreed on an annual basis from April to March each year. Prices to steelmakers in those countries have increased by almost 100% over 2009-10 price.

However, Luo Bingsheng, vice president of China Iron and Steel Association said that the long-standing tradition of annual contracts brings stability to the industry and that steelmakers in China would oppose any move to quarterly pricing. Meanwhile the Chinese government has backed its steelmakers with Jia Yinsong, an inspector from the Ministry of Industry and Information Technology's Raw Material Division, telling reporters at the China Iron Ore Conference this week: "We will certainly support long-term prices."

Mr Jia said that spot prices for iron ore will cause operational risks for companies, a risk for the industry as a whole and a credit risk.

Mr Jia added that he is concerned about the high inventories of Chinese iron and steel producers. The average profit margin for members of the China Iron and Steel Association was only 2.2 percent in 2009 and if iron ore prices double under the 2010 agreement this will push the entire industry into the red. Li Xin, head of the China Metallurgical Industrial Planning and Research Institute said that steelmakers would then be forced to pass price rises on to their customers, which will lead to higher costs for manufacturers of items such as automobile, consumer electronics and home appliances.

Commenting to the Chinese newspaper, People’s Daily, Mr Li said that Chinese steelmakers must break the stranglehold that the three largest iron-producers have on the industry. Chinese steel producers must go abroad, "If Chinese steel producers can control over 300 million tons of annual iron ore output abroad, the trend will be reversed," he said.