China in poor negotiating position, analyst

Record levels of demand have put China in a bad position to demand bigger price cuts to Australian iron ore, a leading resource analyst told MINING DAILY.

Record levels of demand have put China in a bad position to demand higher price cuts to Australian iron ore, a leading resource analyst has told MINING DAILY.

Earlier this week China’s leading negotiator of steel prices, China Iron & Steel Association (CISA), said it would not agree to average contract price cuts of 37% that were negotiated between Rio Tinto and leading steelmakers in Japan and South Korea.

According to James Wilson, a resource analyst for Perth-based financial firm DJ Carmichael & Co., the fact that the Chinese have been importing so much iron ore in recent months makes it difficult for them to justify their appeal for bigger cuts, believed to be in the range of 40 to 50%.

“The Chinese imported 57 million tonnes of iron ore in April to substitute their high cost domestic production and lower spot prices,” he said.

“Their demand is huge and that doesn’t put them in a good position to hold out for a bigger price cut.”

Despite its position as a lead negotiator of the country’s steel prices, CISA represents only 72 of the more than 700 Chinese steel mills and, according to Wilson, many of those mills are State-owned.

“This can be seen as the Chinese Government trying to hold out for bigger price cuts from the Australian iron ore producers,” he said.

Wilson said that regardless of any appeals for lower prices, Australia remains in a strong negotiating position because of the quality of its iron ore and its geographical location.

“China can produce its own iron ore, but it is at a far lower grade than ours, around 15% Fe, which means they have to beneficiate it more which drives the price up,” he said.

“Australia also has the advantage in that it takes a ship eight days for a ship to get to China from Australia, whereas it takes 25 days from Brazil, which is the other major iron ore producer.”

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