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China in a tight corner, say analysts

By Wang Ying (China Daily)
Updated: 2009-05-27 08:08

The price agreement inked between Rio Tinto Group and Nippon Steel Corp will put China in a difficult position at this year's iron ore negotiations, according to analysts.

Ding Bo, an employee with Baosteel, the barometer of China's steel industry, said this would leave uncertainties for China's negotiation price. "According to the practice over the years, once the price was set, we had no choice but to follow it," he said. But this year, as China Iron & Steel Association (CISA) has firmly insisted on a 40 percent price cut for iron ore," things would be more complicated".

Officials from CISA refused to comment on the latest negotiation results. Calls to Chen Ying, Baosteel's board secretary, went unanswered.

Related readings:  Rio cuts key iron ore prices by 33%  China considers setting iron ore price index  Demand, speculation push up iron ore imports  Chinese steel mills turn to more imported iron ore

"Such a deal would block China's efforts to get a 40 percent price cut. It is very likely that China will end up accepting the 33 percent price cut," said Hu Kai, analyst, Umetal.com. He pointed out that the deal would lead to a distorted price system, one in which spot prices are lower than long-term prices. This would also erode the margin of large steel mills such as Baosteel and Wuhan Iron & Steel Corp, added Hu.

However, Zhu Limin, analyst with Shanghai Securities, argued "the deal is not done". "Recently, we have seen a 40 to 50 percent cut in steel production globally, and there is a yawning gap between iron ore supply and demand," Zhu said.

"Instead of the three major iron ore giants, we have a lot of more choices. Take Australia for example, there are Gindalbie Metals Ltd, and many others. We can also buy from suppliers in India and South Africa," Zhu said.