In a common Chinese bargaining tactic staged daily at markets and shopping malls, buyers usually pretend they are walking away if sellers refuse to offer a better price. The same strategy is now being used by Chinese steel mills to negotiate with tough Australian iron ore miners.
Chinese steel mills, at an impasse over ore prices with Australian suppliers, plan to turn to Brazilian suppliers instead for the iron ore imports that feed economic growth in China, China Daily reported Wednesday, quoting a shipping research house and a port operator.
According to shipping data provider AXSMarine, spot iron ore vessel bookings from Brazil to China surged to a record 39 in July after the Chinese government detained four Rio Tinto ( RTP - news - people ) employees, up from 24 bookings in the previous month. By contrast, vessel bookings from Australia's main iron ore ports to China dropped to 31 in July, the lowest level since February, and down from the 40 bookings in June.
Iron ore price negotiations and shipments between Anglo-Australian miners Rio Tinto and BHP Billiton ( BBL - news - people ) have been almost frozen since four of Rio Tinto's Shanghai staff were detained by China’s Public Security Bureau in early July on charges of bribing Chinese steelmakers to obtain "state secrets" about sensitive price information during the annual iron ore contract price negotiations. On a diplomatic level, there is also rising tension between Beijing and Canberra, with each accusing the other of unfair treatment.
Zang Dongsheng, deputy general manger of Rizhao Port Group, told China Daily that some of his customers have cut their shipping orders from Australia and booked more from Brazil. Rizhao Port Group is China's largest iron ore port operator, and handles a fifth of the country's iron ore deliveries. The company, however, could not provide the exact figures about previous shipments from Brazil and Australia before September.
Official figures from China's Ministry of Transport showed Tuesday that China's main ports received 56.5 million metric tons of iron ore in July, up 35% from last year. In the first half of this year, iron ore imports surged 29.3% on an annual basis to 297 million metric tons.
Amid unprecedentedly strong demand for iron ore for China’s rapid development, Chinese steel mills this year refused to follow the industry practice of agreeing to long-term contracts for iron ore at prevailing industry prices with the three major iron ore producers, including Rio Tinto, BHP Billiton, and Brazil’s Vale.
The situation became especially tense after Rio Tinto turned down an offer from Chinalco to acquire its major mining assets and to subscribe its convertible bonds. Rio Tinto instead turned back to its rival BHP to merge their iron ore assets in Western Australia.
Chinese steel mills, led by China Iron & Steel Association (CISA), in the bilateral negotiation with Australian miners, refused in May to accept the 33% iron ore price cut offered by miners and walked away from the discussion table. Japanese and Korean steel firms agreed to the 33% price reduction and signed long-term contracts. Since then, China has been stuck buying ore at the higher spot prices, as tensions simmer between China and Australia.
The future iron ore price bargaining between Chinese buyers and Australian sellers is expected to turn even tougher, Xianfang Ren, an analyst with IHS Global Insight, said in a research report released last week.
Ren remarked that China’s dramatic arrests of four of Rio Tinto’s employees in early July was just a curtain-raiser for China’s decision to toughen up its stance in iron ore pricing.
Ren pointed to signs that the Chinese government, with its huge volume of ore purchases, was determined to seek greater bargaining power in iron ore pricing for the sake of Chinese development as early as the end of 2008, when the Ministry of Commerce, which oversees the iron ore talks, shocked the market by handing over the power of iron ore negotiation from China’s largest steel company Baosteel, to China Iron & Steel Association (CISA)—a quasi-government-run entity.
Baosteel had been representing China in the annual iron ore talks since 2003, yet the big steel brother was blamed for failing to take care of its little Chinese brothers when it agreed to what they saw as an outrageous 96.5% hike in iron ore prices in 2008. In order to have a greater control over the iron ore industry, the Chinese authorities have reduced iron ore import licenses to only 112 companies, which include 70 large steel mills and 42 trading companies. The remaining 1,200 small and medium-size Chinese steel companies must buy their ore from the large companies.
To further consolidate the steel sector, China's central planning unit revealed earlier this year an aggressive plan to form five giant steel plants through mergers and acquisitions. The big five are expected to account for 45% of the country's steel output by 2011.
“However, how this consolidation will play out remains to be seen, as the steel industry has been listed as a pillar industry in almost all Chinese regions and any capacity reduction will understandably meet strong resistance from local governments,” said Ren.