IRON ORE
ready to expand on the international market.
In 2003, China surpassed Japan as the world’s largest iron ore
importer (at 326 Mt – an increase of 18%) and accounts for 42% of
total imports. Japan’s imports increased modestly to 134 Mt.
Together with the third (Germany) and fourth (Republic of Korea)
largest importers, these countries accounted for over 70% of total
world imports. European imports are considerably smaller and
account for 22% of the total.
Iron Ore Prices
The Chinese firmly took the lead in the 2007 iron ore price negotia-
tions. After several years of Chinese steel companies sitting increasing-
ly uneasily on the back seat, the Baosteel Group decisively took the
wheel by concluding the first agreement for 2007 in the first round of
negotiations with Cia Vale do Rio Doce (CVRD – 21
st
December 2006).
The mark-up was 9.5% for fines. The price was set at USc73.20 per dry
metric ton unit (dmtu) FOB Ponta da Madeira and USc72.11/dmtu
FOB Tubarão. Baosteel Group is one of the major Chinese steel produc-
ers and represented a large group of Chinese steel companies with
annual iron ore import demand of over 300 Mt. The following day,
Baosteel also concluded agreements with Hamersley and BHP Billiton
for the same increase (9.5%). The price was set at USc102.64/dmtu
for lumpy ore and USc80.42/dmtu for fines. CVRD continued negotia-
tions over Christmas and on 26
th
December deals were struck with the
Japanese negotiating group [Nippon Steel, JFE Steel, Sumitomo
Metals, Kobelco and Nisshin Steel] and POSCO of Korean .
The Koreans had earlier agreed with the Japanese to coordinate
their negotiations. All these deals were made at 9.5% increases. The
first agreement in the European market was also made before the
end of 2006, when Italian ILVA agreed to a 5.28% price hike for pel-
lets from Tubarão (USc117.96/dmtu) and Ponta da Madeira
(USc121.08/dmtu).
This was the first time since 1995 that the first settlements were
made in December. The Chinese now lead the negotiations, together
with CVRD – setting the price with the largest producer. This means
that a certain order is being restored to the unruly negotiating mech-
anism seen in recent years. Thus, CVRD maintains a firm grip over the
process and has been the first price setter for the last seven years.
The future of the negotiated agreements is still not certain, even if
Chinese demands for an entirely new system have been less vocifer-
ous after the successful “blitz attack” by Baosteel (as it was labelled
by one observer). The effectiveness of a system that forces all buyers
to accept the first deal that is made is still questioned, and calls for a
different system are still heard in China. However, the present system,
which evolved gradually in the late 1960s and early 1970s, is deeply
rooted around the world. The difficulties in introducing a steel con-
tract at the London Metal Exchange (LME), that could possibly have
become the basis for iron ore sales (just as LME base metal quota-
tions form the basis for concentrate sales), is one obstacle to a possi-
ble new system of price discovery. The fact that many iron ore buyers
– particularly in China – have argued for a new system, nobody has
so far proposed any alternative, illustrates the difficulties involved.
The future of the negotiated
A new system may, in fact, be more distant today than it was a year
ago. The fact that Chinese iron ore buyers have taken the lead in
agreements is still not certain, even if
price negotiations could mean that they will be satisfied with the
Chinese demands for an entirely new
present system for at least the next several years. Had Baosteel not
system has been less vociferous ...
been able to make the first deal, the situation would probably have
been quite different and calls for an entirely new system probably
much more vocal.
88 SEPTEMBER 2007 COMMODITIES NOW
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