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By Melissa Pistilli-Exclusive to Iron Investing News
Early last month, Companhia Vale do Rio Doce announced it was looking to raise by 11 per cent, the previously negotiated 65 per cent price increase with China, back in April.
It seems the world’s largest iron ore producer and exporter wants to bring the price of iron ore that it ships to China, in line with the price it negotiated with Europe now that shipping costs have gone down. The Brazilian mining giant got serious when it threatened to cut shipments if the increase was not accepted.
In reaction, China’s iron and steel companies have, instead, signed supply contracts with domestic mining companies. If things continue along this track, Vale may come to regret its actions. The feeling amongst many Chinese industry analysts is that Vale may be on the verge of losing the Chinese market over a decision deemed “untimely and unreasonable.”
On Thursday, the Chinese Steel and Iron Association announced that its member-companies were essentially boycotting Vale and instead using domestically produced iron ore. While some may see this as breach of contract, Chinese firms could argue that Vale had breached the contracts first by attempting to additionally raise prices for the year.
Vale’s response? Chief Executive Officer Roger Agnelli said the Chinese steel industry will have a critical dilemma on its hands after Vale suspends iron ore shipments. The Chinese, though, seem unfazed.
Du Wei, Chinese Umetal.com senior steel industry analyst, called Vale’s decision “untimely.” Wei said, “At this point, Vale’s supply cut doesn’t matter that much to China, but it may risk losing the Chinese market altogether if it continues to stick to the price hike.” Because of the global economic slowdown’s effect on the Chinese economy, steel demand has declined along with steel prices causing Chinese steel firms to curtail output levels. All of this has created a drop in demand for iron ore.
Vale chose the wrong time to raise its prices, agrees CISA Vice Chairman Luo Binsheng. “Vale should be aware that China doesn’t need that much iron ore now. Demand for import iron ore is becoming weak since domestic output of iron ore has significantly increased,” he said. Over 80 million tonnes of imported iron ore are stockpiled at Chinese ports, added Luo.
“Current decline in domestic demand has helped build up a reserve of iron ore. The current storage could keep steel makers running for at least three months,” said Umetal analyst Zhang Ping.
China seems confident it can go on without Vale and supply its own iron ore. According to China Metallurgy Industry Planning Research Institute Vice Director Li Xinchuang, “With 600 million tons of raw iron produced annually, it was possible to replace Brazilian products with domestic supply.”
Not only was the decision untimely it was also unreasonable, said Zhang Junsheng, University of International Business and Economics’ foreign trade expert. “Vale raised prices unilaterally, which breaks international trade rules and breaches the supply contract.”
If domestic supplies do not prove to be enough, China will seek to purchase iron ore mines globally. One of the country’s largest state-owned steel companies, Jiangsu Shagang Group, recently acquired a 45 per cent stake in Australia’s Grange Resources. The company also controls Australian Bulk Minerals and its Tasmania iron ore mine. Shagang wants to combine the two into one iron ore miner.
According to Zhang Junsheng, other Chinese companies were also hunting for alternatives to Brazilian mines. China Metallurgical Group, one of the country’s largest steel-makers, came to an agreement in August with Russia’s top iron company, Evraz Group, to co-operate on an Australian iron mine. China’s second largest iron-ore trading company, Sinosteel, is in the process of completing a takeover of Australia’s Midwest Corp.
