Lex: China/iron ore

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Being the biggest kid in the playground does not guarantee everyone else will play ball. China has apparently fumbled this year?s round of negotiations to set contract prices for iron ore, critical for making steel. Traditionally, the world?s big three ore producers ? CVRD, Rio Tinto and BHP Billiton ? negotiate a price with a European or Japanese steelmaker, thereby setting a global benchmark.

Having emerged as the world?s biggest importer of iron ore, China is demanding, in strident terms, little or no price increase this year.

However, Posco, the Korean steel producer, on Monday agreed a 19 per cent increase with Rio. CVRD struck similar deals with ThyssenKrupp and Mittal Steel last week.

In spite of its size, China?s leverage over foreign miners is limited. Almost half its consumption is imported. About 70 per cent comes in the form of fine particles. Thyssen, by contrast, uses more large, processed pellets, which have fallen in price. This allows it to take a hit on ?fines?, while striking a better deal overall.

The structure of China?s steel industry does not help. A long tail of small mills take low-quality domestic iron ore and are barely profitable but employ millions. That makes it politically difficult to cut steel production overall, squeezing margins for everyone, while leaving national champions such as Baosteel bearing the brunt on imports.

Chinese bluster, blaming the ?individualism? of near neighbours, is, therefore, just that. China?s industrial expansion and the fact that this is its first stint at the negotiating table suggest calmer talks in future. The current impasse also reflects the fact that Chinese hot-rolled coil steel fetched only $300 per tonne at the beginning of the year. That has since risen to about $400.

Some loss of face may be inevitable, but China?s steel companies can afford to live with it.

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