Vale's Demands Encourage China's Scattered Steel Industry Consolidation
Friday, 12 September 2008
Shortly after the dragged-on 2008 negotiation for long-term iron ore supply contracts concluded, Brazil-based Vale, the world’s largest iron ore supplier, seeing it had been out-bargained in the China market by its vast Australian competitors BHP Billiton and Rio Tinto, is doing its best to raise its present contracted iron ore price for Chinese and other Asian steel makers in 2008 by as high as 20%. This has naturally triggered a strong reaction from Chinese
steelmakers. In response, some analysts are suggesting that China’s dispersed steel industry should form a few sourcing groups to gain some leverage in their upcoming negotiation with the world’s three iron ore giants for the long-term iron ore supply contract in 2009.
Vale now wants its Chinese clients, with whom it has already signed a long-term supply contract, to pay the same, higher, prices as its European clients. The Chinese firms have replied that they would make their decision after discussions with the China Steel and Iron Association, which is known to be unenthusiastic about any price hikes.
Although domestic steel makers have not yet succumbed to Vale’s demands, the dispute will certainly affect negotiations for the 2009 iron ore supply which will begin in two months.
Vale admitted yesterday in a declaration that the company is consulting with its Asian clients over a price increase. Currently iron ore prices for different varieties in the Asian market are 11.0% to 11.5% lower than those in the European market. It has been reported that Vale wants a 20% price rise, but as yet there has been no confirmation by the company.
Vale emphasized it was talking with steel companies, and could not guarantee an agreement would be reached on a higher price. If they succeed, the price hike will bring Vale a boost of nearly 3% of the total income of fiscal year 2007/2008. Vale’s total income in that fiscal year reached $35.5 billion.
During the 2008 negotiation, the two Australian suppliers, BHP and Rio, haggled a higher price than Vale, breaking a pricing mechanism that had lasted for 28 years.
The steel industry had supposed the 2009 negotiation would be more difficult, but had not expected Vale to make any move before the negotiation by asking for higher prices to balance the Australian suppliers’ gain in July.
Luo Bingsheng, vice-chairman of China Steel and Iron Association, says the organization was in discussion with steel makers and could not reveal details for the moment.
Zeng Jiesheng, an analyst for mysteel.com, said although sea freight of Brazilian iron ore is costlier than that of Australian ore, Vale has its own advantage as the quality of its ores is better. Vale has always tried to maintain the traditional pricing mechanism. Since sea freight has seen a drastic decline, it will be even more dissatisfied.
Due to the global economic downturn, iron ore buyers have gained weight in the supply/demand relationship. The iron ore spot price is getting closer and closer to the contract price, and may even fall below it in the near future. Under such circumstances, “Vale’s demands are out of accord with international game rules, and it will not be accepted by the steel industry,” said Zeng Jiesheng.
As the high-quality iron ore market is still dominated by the three international giants, Wang Jianhua, vice-director of mysteel.com, suggests China should promote steel industry consolidation, organizing three to five groups to reduce sourcing and transportation costs and increase pricing power. Wang Jianhua thinks China can now form four such groups: the four large state-owned steel companies led by Wuhan Iron and Steel (Group) Corporation; private large and medium sized steel companies led by Shasteel; small- and medium-sized state-owned steel companies led by Sinosteel; and other steel makers and steel trade and logistics companies led by Minmetals.
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