MercoPress. South Atlantic News Agency

China steelmakers demand “40% or more” cut in iron ore prices

As the world’s leading steel producer, China plays the music.

China's Iron and Steel Association, CISA, maintained its campaign to slash 2009-2010 iron ore term prices by 40% or more, putting out a report on its Web site Sunday that rounded up opinions from a string of Chinese mill executives.

“Many mills have said it would be difficult to accept a 33% cut, and they await a bigger cut,” the report said, later citing similar sentiment from officials from Wuhan Iron and Steel International Trading Corp. and Baosteel Group Corp.

The price cut failed to reflect the real supply and demand situation on the international market and would lead to overall losses for Chinese steel companies, the CISA said in a statement on its website.

Anglo-Australian miner Rio Tinto Plc agreed last week on price cuts with Japanese and Korean mills that at their baseline were 33% off last year's terms.

Chinese steel interests say a 33% discount would mean ore prices are still higher than 2007 levels by 10 US dollars a metric ton, amid weaker demand for steel, the report said.

“This does not represent the mutually-beneficial relationship between steel producers and iron ore suppliers” said the CISA statement. “Chinese steel companies will not accept or follow the price cut.”

The stance marks a break with the tradition of the past 40 years, whereby the first price agreement between a miner and a steelmaker forms the benchmark for the rest of the industry.

However mills and traders may have to accept a 33% cut if spot iron ore prices move higher, an unidentified official from Shandong Laiwu Steel International Corp. was quoted as saying in the report.

The Laiwu official added that spot prices aren't likely to be pushed higher, because “spot prices are primarily decided by demand, and currently steel demand has not recovered”.

The quandary for Chinese negotiators is that their position depends on projecting a sense of weak demand, even as policymakers guide the Chinese economy toward recovery. The numbers in May didn't strongly favour the Chinese side.

Spot delivery prices for Indian ore rose slightly in May and steel prices have also risen since late April, according to the China Iron and Steel Association's data.

Industry analysts believe steel demand is tentatively recovering because of the seasonal resumption of building activity, stimulus-led infrastructure projects and the auto sector's revival. Spot prices are currently 30%-40% below last year's term rates.