The bad omens for Australia's iron ore producers kept streaming out of China on Thursday.
As BHP Billiton and Rio Tinto wrangle with Chinese customers over annual iron ore contract prices, signs point to a bigger-than-expected surplus of the raw material in the Asian giant.
According to the latest industry figures, China's iron ore stockpiles jumped 9 per cent to 60 million tonnes in just three weeks last month as miners rushed to sell their product due to fears that demand would deteriorate further.
The surprise increase in iron ore supplies comes as Chinese steel mills make further production cutbacks, with around 20 blast furnaces in the city of Tangshan idled in recent weeks.
The combination of rising supplies and slowing demand threatens to crunch iron ore miners and strengthen the bargaining position of steel makers -- right in the middle of the 2009 price talks.
Zhu Jimin, chairman of China's sixth largest steel maker, Shougang Iron & Steel, was quoted in local media as saying the industry would only accept iron ore prices at 2007 levels.
That implies a hefty 50 per cent discount on last year's bumper supply deals, when rates nearly doubled due to surging demand for the commodities needed to drive China's rapid industrialisation.
And it is at the lower end of forecast prices for 2009, with most analysts predicting a drop of between 20 per cent and 50 per cent.
Nevertheless, Mr Zhu maintained that a halving in current rates would be a fair outcome for both sides of the negotiations.
"The price should give miners some profit room for their sustainable development, and it should also be in a range the steel mills can bear," he said.
"A price that hurts the interest of one side will lead to disorder in the industry."
The world's three big iron ore producers -- Rio, BHP and Brazil's Vale -- negotiate annual iron ore supply agreements with China's major steel-maker, Baosteel.
The rest of Australia's iron ore producers and other Chinese steel mills then settle their own contracts based on those terms.
The current round of the closely guarded negotiations is believed to have started soon after 2008 terms were settled in July.
Agreement is traditionally reached between New Year and Easter, but last year's talks dragged on for longer than usual as BHP and Rio fought for prices to account for the lower cost of shipping iron ore from Australia compared with Brazil.
But that hard-won concession is nearly certain to be wiped out in 2009, as freight rates from the two big iron ore producing nations has narrowed dramatically due to the collapse in Chinese orders.
The chances for an early settlement are slim this year, with BHP, Rio and Vale expected to string out negotiations for as long as possible in the hope that steel demand will pick up as China's massive $US586 billion ($A909 billion) fiscal stimulus package takes effect.
Source: The Australian
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