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Spot ore rates may determine steel lobby stance

By Zhang Qi (China Daily)
Updated: 2009-07-22 08:05

The spot price of iron ore will climb in the second half of the year if the Japanese and South Korean economies recover, and this possibility may force China to accept the 33-percent discount in full-year ore rates now being offered by global miners, industry experts said.

The spot price might exceed the annual negotiation price in the latter half of this year, driven by other countries' economic recovery and China's turning to iron ore at cash prices, said Yan Song, a fund manager at private equity firm Hao Capital who has been involved in steel industry investment for years.

Iron ore for immediate delivery advanced 4.6 percent to $91 a ton last week, the highest since October last year, according to Metal Bulletin prices.

"Chinese steel mills are increasing the proportion of iron ore imports at cash price to enhance their power at the annual iron ore price talks," he said.

"The 33-percent discount offered by global miners is unlikely to change, but the pricing system may possibly change with time," he said.

Wang Xinguang, another fund manager at Hao Capital, said there was no need for China and other Asian countries to accept the current discount.

"The rule is expected to go in two or three years. China should sign a separate pricing system with global miners," he said. "Changing the annual iron ore price to a half-year based pricing system is preferable."

"It's like playing a game. If the iron ore prices continue to fall when the new system is adopted, Chinese steel mills can avoid the risk of high raw material prices," Yan said.

Special Coverage: Iron Ore Price Talk Related readings:  New iron ore pricing plan soon  Talks on iron ore rate cuts continuing  China stops talks with Rio, turns to Vale: report  Rio Tinto-Chinalco $19.5B deal foiled  China's Wuhan steel group to cooperate with Australian firm

Steelmakers were locked into annual pacts when the price of iron ore fell. The spot price of iron ore is about $80 a ton now, but prices topped $120 a ton last year, Wall Street Journal reported on Monday.

"But if the iron ore price rises, the half-year based pricing system is not good for Chinese steel mills as the contract price might go up. But it can force Chinese steel mills to enhance their efficiency, optimize their structure, and help propel overseas acquisitions," he said.

In fact, China's third-largest steel group, Wuhan Iron & Steel, agreed to invest $186 million in South Australia's iron ore industry, Xinhua reported yesterday.

The steel mill will spend up to $186 million to take a 60-percent stake of Adelaide-based Centrex Metals.

The joint venture will develop two iron ore mines over the next seven years.

China's steel stock has continued to fall, touching 8.96 million tons in June, down 140,000 tons from May, according to a report released by China's premier steel industry lobby.

China's steel demand was picking up steadily, driven by the recovery of the manufacturing and property sectors, the report by the China Iron and Steel Association said.

China's steel prices will rise further, pushing up the metal's price in global markets, as government public works spending spurs demand and mills charge more to cover raw material costs, Bloomberg reported.

Meanwhile, Anshan Iron and Steel Group Corporation said in a statement yesterday that none of AnSteel's employees were involved in the Rio Tinto investigation being conducted by the relevant government departments.