The Rising Influence of Rising Affluence

[DewDiligence]

China’s Holdout on Iron-Ore Pricing Looks Iffy

[Please see #msg-38113508 for background.]

http://online.wsj.com/article/SB124384853338771693.html

›JUNE 2, 2009
By ANDREW PEAPLE and CHUIN-WEI YAP

China's steelmakers seem to be fighting a losing battle in this year's iron-ore price negotiations. But they may help bury the current price-setting system.

China's Iron & Steel Association is refusing to follow the 33% cut in the iron-ore contract price that leading steelmakers in Japan and South Korea agreed to with Rio Tinto. Instead, CISA wants a reduction of 40% or more because of weaker demand for steel as China's economy slows.

Unfortunately [for Chinese manufacturers—for miners, this is fortunate :- )], macroeconomic numbers point the other way. Monday, China's manufacturing purchasing-managers-index data were again above the expansionary level of 50. China's iron-ore imports hit record volumes in March and April. Steel prices have been creeping up since late April, after a prolonged slump.

What's more, iron-ore spot prices are now rising. Leading miners are unlikely to agree to long-term contract prices much below the current spot price, making CISA's chances of success look remote.

Nonetheless, its resistance is another crack in the price-setting system. Previously, steelmakers have tended to fall in line once a few leading firms on either side of the negotiating table set a benchmark price.

That started to fall apart last year, when Australian miners Rio Tinto and BHP Billiton negotiated a higher iron-ore price than Brazil's Vale. China's stance is now showing the buying side is also less than cohesive.

BHP has suggested contract prices be set in line with some kind of price index; others have called for a move toward spot pricing and the development of an iron-ore futures market. The current standoff may eventually help force the adoption of one of these alternatives to the anachronistic system now in place.‹