Manufacturing News

CISA stance hurts small steel mills

China's top negotiators in the bitter and protracted row over the price of iron ore seem destined never to agree - risking a loss of face that will raise questions about whether they are up to the job and who it is they are actually representing.

Their apparent refusal to compromise is damaging the competitiveness of smaller domestic steel mills, forcing them to buy from their larger counterparts, say analysts. The bigger firms have been content to pay whatever the spot price is for ore and pass on the premiums.

Benchmark spot prices of iron ore in China rose above 110 U.S. dollars a ton this week, as compared with 58 U.S. dollars a ton in April, according to industry consultant Mysteel.

"The CISA should have the right to represent all Chinese steel mills in theory because its members not only consist of large State-owned steel mills but also small- and medium-sized steel firms," said Xu Xiangchun, director of Mysteel, adding its standpoint was on behalf of large steel companies, not from the whole industry, making it less representative.

Xu said those conducting the talks have overplayed a weak hand and left the domestic steel industry seriously disrupted as a result.

CISA has demanded a price cut for the 2009-10 annual prices of 40 to 45 percent, while miners Vale of Brazil, Rio Tinto and BHP Billiton offered a 33 to 28 per cent cut.

Although the China Iron and Steel Association said the talks with the world's leading iron ore producers were still ongoing, nothing concrete has emerged months after they began and well past the June deadline.

China's steel industry made profits of 84.6 billion yuan last year. If the price of iron ore fell by 10 U.S. dollars per ton, it would have saved as much as 34 billion yuan, analysts estimated.

CISA insists it wants to turn the iron ore industry from a seller's market to a buyer's market. It believes that by acting with one voice it can bring more leverage to the negotiations over price.

The CISA emerged from the former Ministry of Metallurgical Industry. It is made up of 216 members. Most of the 72 key members are State-owned steel mills. "Can it really represent China's 1,200 steel companies?" asked Xu.

CISA's Chairman, Deng Qilin, is also chairman of Wuhan Iron & Steel Group, China's third largest steel mill, while other deputy-chairmen preside over large State-owned steel firms.

Xu said CISA should accept the 33-percent cut it rejected in May, adding the association often acted like a bureaucratic organization.

Li Xiaowei, vice-chairman of CISA, told China Daily earlier that CISA would rather give up the annual iron ore price talks than accept the 33-percent discount.

The association's authority has also been undermined as the high demand for steel has led to a surge in iron ore imports.

Some steelmakers are also reported to have already signed contracts with BHP Billiton, in defiance of CISA's control of the negotiations. Other steelmakers are said to have reached preliminary agreements with Rio Tinto and Vale for a 33 to 28 percent cut, without making them public yet.

The current pricing debacle has not hampered the small cap's negotiations with the world's largest steelmaking country, and they have settled prices using methods that satisfy their Chinese customers.

Atlas Iron, which sells to four different Chinese mills, uses what it calls a "mutual fairness clause" to settle prices, Atlas's managing director David Flanagan said.

"We've got agreements which are based on a benchmark, but then if the spot price varies above or below the benchmark by a certain point amount..., we would average so we'll get half of the upside, but also share half the downside," Flanagan said.

Analysts said the Chinese steel industry is expected to post a profit of 100 billion yuan this year. Such a figure, set amid the intractability of the talks, brings in to question the purpose of CISA.

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