China fights freight premium as iron deadline looms

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

30 Apr 2008

China's steel industry still opposes including any freight premium in iron ore prices in negotiations with Australian miners, even as pressure rises to seal a deal in the next two months. Asian steel mills' negotiations with the miners on annual term iron ore prices have stalled over the proposed inclusion of a freight premium sought by the Australian miners to offset the higher cost to China of importing Brazilian ore.
Under the terms of some contracts, miners need no longer supply iron ore to their Chinese customers after June 30, leaving the Chinese industry with the unappetizing choice of renegotiating contracts at that point, paying much higher spot prices or accepting prices recommended by mediators.
"We hope that the negotiations are resolved before June 30 and that we don't have to face this problem," Luo Bingsheng, secretary general of the China Iron and Steel Association, or CISA, told a news conference on Tuesday.
"We oppose any settlement of a 'China price', and we strongly reject including freight differentials in the term price calculation. This we cannot accept."
Luo did not elaborate on the 'China price', which might involve including a term shipping component. While Japanese mills generally already have term shipping agreements that protect them from high spot rates, most Chinese buyers are exposed to volatile freight rates.
Traditionally, all mills and miners accept the annual deal that is negotiated between any two parties.
But although Brazilian miner Vale has reached an agreement with Asian and European customers for the year from April 1, rivals BHP Billiton and Rio Tinto are holding out for higher prices.
Although China's top mill Baosteel represents China's steel industry in the talks, CISA has significant authority behind the scenes.
Term prices have been well below spot prices for the last few years, benefiting China's largest mills and iron ore traders, who buy at term prices and resell on the mainland at spot prices.
After aggressive purchases in the first quarter, stocks in Chinese ports in mid-April were just short of one month's consumption, according to CISA stats.
Those port stocks and a spot tender by BHP Billiton have helped spot prices soften to just over $190 a tonne for 65 grade Indian ore, from a peak of about $202 a tonne six weeks ago.
"Stocks are pretty good. Spot iron ore prices will struggle to move up further," said Henry Liu, of Macquarie Research.
"As for the term negotiations, we have to wait and see."
But high freight rates mean that there is still a difference of more than $50 a tonne in shipping ore from Brazil to Asia versus shipping it from Australia, and both BHP and Rio, eager to maintain shareholders' loyalty in a takeover battle, still want to recover some of that difference.
In the long-term, though, Chinese mills need to secure more of their own iron ore supply to protect against volatile raw materials prices that are raising the cost of production, Luo said.

Source: Reuters