UMETAL-CHINA, China failed in sealing the benchmark price agreement with miners in 2009, signaling incomplete project for 2009 benchmark iron ore negotiation. For a long time in FY2009, Chinese steel mills were paying 80% of 2008 benchmark price for iron ore from miners. New contract prices, which are agreed on by the largest iron ore miners and steel mills, usually take effect on April 1. But price changes are applied retroactively. However, the breakdown in negotiations between China and miners means no new contract price was agreed on in 2009. Chinese steel mills have not so far got repaid by miners, unfortunately meaning massive capital of Chinese steel mills was tied up by miners.
How to start 2010 negotiations?
The failure of 2009 negotiation presented Chinese steel mills with a dilemma, with no payment returned if they start new negotiations based on 2008 benchmark price on the one hand, and impossible for Chinese steel mills to accept the first settlement by Japan and South Korea on the other hand.
Who will take the leadership for the new negotiations?
CISA, which firstly replaced Baosteel as the leader for the negotiations, had been very aggressive in the process of talks and always trimmed down the forecasts. It did not soften its stance after the first settlement accepted by Japan and South Korea. In contrast, Baosteel lost its power. However, Rio Tinto Case finally ended up the 2009 negotiation with failure.
Both CISA and Baosteel think 2010 negotiations are too hot to handle and so each of them refuse to take the leadership. For sure, miners are unwilling to start the talks.
Whom to negotiate with?
CISA was an unwelcome negotiator in 2009 talks, since steel mills are the miners' clients rather than CISA. And steel mills did not entrust the task to CISA by legal documents. If steel mills granted the task to CISA, miners should grant associations in Australia and Brazil as the negotiator.
Mining companies had no alternative but to negotiate with the association. However, they did not reach agreement and Chinese authorities announced a probe into Rio Tinto mining executive Stern Hu. The iron ore price talks collapsed at last. And mining companies therefrom declined to be in touch with China. Moreover, miners discovered that iron ore was sold as usual despite pending negotiations. They would suffer no losses no matter Chinese steel mills paid 80% based on 2008 contract or agreed to a 33% price cut. Therefore, it makes no difference to them whether to conduct the negotiations. Given the situation of this year, miners make light of the 2010 negotiations even more.
What will they talk about?
China formally started iron ore negotiations in 2004 and the negotiations collapsed in 2009. Although there was only 6 years for China against 20 for Japan and 40 for Europe, it indeed overthrew the long-term contract system. Both sides could breach the terms of agreement after they initially settled the prices as benchmark. Also, they could set a temporary price and continue trade without initial deal.
Spot iron ore pries were much higher than benchmark prices before 2008. Brazilian and Australian mining companies once didn't honor the agreement. In 2008, benchmark prices moved higher than spot prices and Chinese steel companies scrapped long-term contracts. The breach of contracts has ruined their trust and the contract of volume and price has been so much waste paper. Then what will they continue to discuss? And do they still need to conduct the negotiations?
Both sides had broken the rules and a breach of agreement is common. It makes no sense to hammer out a price by the individual. There is also no need for China to continue to seek a small price hike. Even though it wins a victory in the price, miners may refuse to execute the price. It is tantamount to self-deceiving for China. Against the backdrop of crashed rules, China needs to have a genuine desire to communicate with miners. And they should ensure win-win interest after developing a new plan and be sure not to regard the commercial negotiations as political negotiations any more. (US$ 1 = RMB 6.8255; Contributing by Hu Kai: Compiling by Ivy Li & Zoe Liao)
(source:umetal.com)