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Iron ore price negotiation - Chinese view point- 16 May 10

Xinhua reported that negotiations on prices and contract changes between the world three mining giants and their largest customers including China steel companies have gone nowhere so far.

The three mining heavyweights, also known as the "Big Three" Companhia Vale do Rio Doce, Rio Tinto and BHP Billiton seem to have the upper hand in the talks as they enjoy a de facto market monopoly and benefit from tight supplies. But they could well end up shooting themselves in the foot if they put short term financial gains ahead of their long term strategic relationship with China. Worse still, while demanding price increases of more than 90% they could also harm the nascent global economic recovery by applying upward pressure to inflation.
As per report, despite the current impasse between the Big Three and China steel companies, the two sides have a great common interest in long term strategy. The Big Three are crucial to China steel companies because they are the largest providers of iron ore to the Chinese market, while China is important to the Big Three because China is their strategic export market.

Hefty price increases in iron ore would hit the Chinese steel companies hard, making them financially less viable or even forcing some to close. As a result, the Chinese market for iron ore will shrink gradually, which in turn would only harm the Big Three. In other words, the Big Three cannot benefit from strangling their customers from a long term point of view.

Furthermore, when iron ore prices go up, so do the costs of many other crucial sectors, such as autos, construction and electronics, forcing up their prices and threatening the fragile global economic recovery.
The Big Three also demand contracts should be negotiated on a quarterly basis which clearly breaks a decades long tradition of yearly contracts. With prices soaring to a new high month after month, quarterly contracts give mining companies more pricing flexibility, but they would turn out to be a serious headache for steel companies around the world.

Steel companies usually make financial and production plans on a yearly basis. This kind discrepancy could pose challenging operational risks to them.

May 16, 2010 08:35
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