China Can't Get A Break On Indian Iron Ore

News was prepared under the information support of Online Daily Newspaper on Hellenic and international Shipping "Hellenic Shipping News".

29 Apr 2008

With price negotiations with Australia's mining giants stalled, China is turning its attention to another major supplier of the iron ore it badly needs to power its manufacturing might: India. China sources iron ore predominantly from three countries: Australia, Brazil and India. While less known, India contributes no small part to fulfilling China's demand for iron ore, supplying 20.7% of its imports in 2007. Not so long ago, in 2005, India supplied as much as a quarter of China's iron ore imports, making it the second-largest supplier after Australia, before being overtaken by Brazil.
The iron ore relationship between the two countries has been benign, unlike in many other areas, such as oil, where they compete relentlessly. China gobbles up 88% of India’s iron ore exports, led by India’s largest supplier MMTC. India shipped 79.37 million metric tons of iron ore to China in 2007, earning a total of $4.28 billion. This has contributed to China's status as India's largest trading partner since last year.
In good part because of higher shipping costs, as intermediaries raised their fees, Chinese steel makers had to confront a hefty price rise of 53.1% for the full year of 2007 for iron ore shipments from India, the highest among the countries exporting to China. In December 2007, the average price hit $157.96 per metric ton, an increase of 135.4% year on year, according to data cited by Luo Binsheng, vice president of the China Iron and Steel Association, who spoke during the annual China-India Iron Ore Summit, held Monday and Tuesday in Beijing. Luo pointed out that shipping costs were to blame for 95% of the price rise for Indian iron ore. The solution, he and other Chinese officials said, was to shift iron ore sales away from the spot market, where prices are higher, to lower-priced long-term contracts.
Luo said about 60% of China's iron ore imports are locked in via long-term contracts in Australia, Brazil and South Africa, wherein the shipping fees have been fixed in advance. The remaining 40% are conducted in spot markets, mainly in India, in which the final price is subject to the fluctuations of international shipping costs.
Big Australian and Brazilian mining firms such as Rio Tinto, BHP Billiton and Vale sell to big Chinese steel makers, most of them state-owned, such as Baoshan Iron & Steel. But India sells to small and medium-sized Chinese steel makers. The Chinese buyers also tend to deal with small Indian miners and intermediaries, making collective bargaining for long-term contracts difficult, if not impossible.
Some Chinese officials said the long-term trend benefits Australian miners, which are more cost-efficient and whose product quality is also higher than their Indian counterparts. R. K. Sharma, the secretary-general of the Federation of Indian Mineral Industries, responded by pointing out the difficulty of exerting control over small miners and their intermediaries in India.
Neither side proposed concrete measures to resolve the cost issue.

Source: Forbes