"The situation is tougher, as spot prices soared to a record high in 2007," said Hu Kai, a senior analyst with the Chinese Umetal.com website.
Hu said that the gap between term prices and spot prices of iron ore in 2006 wasn't as wide as in 2007, resulting in a relatively modest price hike. Steel makers were satisfied with the outcome, although iron ore producers considered it unfair.
Soaring spot prices in 2007 changed the equation and pushed up the term prices for 2008.
With demand for iron ore soaring, global miners' production has surged. Vale boosted its 2007 iron ore production by 12 percent, for example, and Rio Tinto turned out 9 percent more ore.
Steel makers' profits also set a record high in 2007, increasing by 30 percent year-on-year, and mining companies wanted to share the wealth.
Baosteel faced a challenge
Baosteel, the partly state-owned representative of China's steel makers in the pricing negotiations, faced a challenge. The miners were holding out for higher prices, while other major Chinese steel producers wanted a favorable pact. Given the huge share of the market that China represents, Baosteel may have believed it had more bargaining power than it did. CISA estimated the 2008 price rise at only 20 percent.
So Baosteel waited -- but others negotiated.
"Even if Baosteel had concluded negotiations first, the price hike would not be lower," said Hu.
Australian mining companies were pushing for a change in the pricing system, which impelled Japanese and ROK steel producers to conclude the negotiations. Australia's Rio Tinto and BHP Billiton have sought a new benchmark pricing system that would be more "flexible," featuring prices that would be set quarterly or monthly.
The Japanese and ROK steel makers were eager to avoid such a change, which would mean more volatility and most likely higher prices for ore. They settled quickly, leaving China to accept the outcome.
Higher prices to have varied impact
The China Securities Journal reported on Monday that 57 domestic steel mills had raised their prices after the benchmark price was settled. And on Tuesday, the newspaper reported that Baosteel had raised steel prices for the second quarter of 2008. Its prices for major cold- and hot-rolled products will rise 800 yuan (111 U.S. dollars) per ton in the second quarter, compared with the first quarter, Tuesday's China Securities Journal quoted an announcement by Baosteel as saying.
Considering that Baosteel has a heavier reliance on imported iron ore than other domestic competitors, a 65-percent iron ore price rise could translate into cost mark-up of 258 yuan for Baosteel, as against 116 yuan for other domestic steel makers, according to statistics from Chemease, a business information provider on Chinese chemical commodity markets.
But a price hike of up to 800 yuan would offset its cost mark-up and also provide ample profit margins, said Chemease analysts.
(Xinhua News Agency February 27, 2008)
