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| CISA Pressured Rio Tinto on Iron Ore Delivery |
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It has been almost three months since Japanese steel mills and Brazilian iron ore suppliers agreed on the first iron ore price for 2008, but the iron ore price talks between Australian suppliers and Chinese and Japanese customers have yet to be settled. In fact, it is possible that the tension may further escalate.
On 15th May, China Iron and Steel Association (CISA) issued a harsh statement, demanding that Australian iron ore giant Rio Tinto earnestly implements its ore supply contracts, and calling on Chinese steel mills to jointly boycott Rio's spot market sales in China.
Low contract implementation rate
The CISA statement, which represents 21 Chinese steel companies that had signed long term iron ore supply contracts with Rio in 2007, said that agreed contract supply volume was 60.73 million tons for the year 2007, while the actual supply volume was 52.37 million tons, equivalent to a contract implementation rate of 86.24%. Seven of the contracts involved an implementation rate of lower than 80%, with the lowest being 53.17%. In contrast, there were only two contracts with implementation rate of less than 80% in 2006, with the lowest being 72%.
Analyst pointed out that according the long term supply contracts, suppliers may reduce the amount of supply in the event of force majeure, but not less than 90%. Therefore, Rio's practice has breached international trade norms. |
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An even more furious development for CISA is that since the last quarter of 2007, Rio had publicly announced that it had up to 15 million tons of iron ore available for the spot trading market.
CISA said that on one hand, Rio had informed their Chinese customers that due to "force majeure, there wouldn't be sufficient iron ore resources to ensure 100% delivery. But on the other hand, Rio had a large amount of iron ore supplies sold to the spot iron ore market in China. "This has made people suspect that Rio is purposely trying to lower its implementation rate on long term contracts and shift some of the long terms supplies to spot markets, in order to reap short term benefits."
The statement called on Rio to appreciate the friendly long term relationship with its Chinese steel customers and earnestly implement the long term supply contracts, "If companies fail to implement the signed supply contracts in good faith, it would be regarded as a discredible behaviour."
Protracted negotiations possible
CISA called on all the Chinese steel companies and iron ore importers not to support or participate in Rio's iron ore promotional activities in the Chinese spot market, before Rio can earnestly implement its long term agreement with Chinese steel companies.
CISA will also pay close attention to the situation of low contract implementation rates by Rio to its Chinese customers in 2006 and 2007, as well as the resultant losses. CISA said it will implement necessary measures to protect the legitimate interests of Chinese steel companies, under the principle of fair international trading and sanctity of contracts.
Mr Xu Xiangchun, Director of Beijing Custeel E-Commerce, a specialist steel information provider, said that such harsh statement is a reflection of escalating tension between China and Australia over the iron ore negotiation process, but the iron ore negotiation mechanism would not collapse.
CISA has been repeatedly signalling a joint boycott of Rio, but it is the first time to publicly announce a joint boycott appeal. Analyst commented that due to Rio's tough stance in the negotiation process, the Chinese side is now using the "low contract implementation rate" as a negotiation tactic to exert pressure on Rio.
Mr Hu Kai, an analyst from China's leading metal news portal Umetal.com, said that the Chinese side is now accessing the consequence of not being able to reach an agreed iron ore price by 30th June and introducing proactive solutions. This implies that China is preparing to insist to the end.
"Iron ore talks between China and Australia has been paused," Hu suggested that China is recently implementing port clearance measures to reduce stockpiles at major ports, in order to ease port capacity and stabilize sea freight prices. At the same time, China is publicly exerting commercial pressure on Rio. It is possible that when these two measures have been completed, CISA will then resume the price talk with Australian miners.
Hu expected that as the existing supply contact between Japan and Australia still has six more months to go from the start of the new financial year, it will be hard to see any meaningful results from the Sino-Australia and Japan-Australia iron ore negotiations in the next 6 months.
Custeel's Xu also said that the supply contracts between Chinese steel companies and iron ore giants did not stipulated that "contract expires three months after new financial year", so it is unlikely the parties will rush to finish the talks. "It would be a breach of contract if Australian suppliers terminate the contract unilaterally. The (benchmark) price has been set, it's just the Australians not accepting it."
But Xu also admitted that due to the concern of supply disruption, some small steel companies may have to accept the large price increases from Australia. But China's negotiators can disregard those insignificant cases.
First FMG shipment to China
On the same day, Australia's third largest iron ore producer, Fortescue Metals Group (FMG), was shipping its first iron ore shipment of 180,000 tons to China, bringing in additional variables to the iron ore negotiation process. It is understood that FMG's initial plan is to produce 55 million tons per year, most of which will go to China.
Mr Luo Bingsheng, Vice Executive Director of CISA, recently said that China's iron ore demand and supply situation will become more settled in the second half of 2008. The first reason is that FMG will supply 15-20 million tons to China, and secondly, a new Brazilian mine is starting to export 1 million tons per month to China. Therefore, the Chinese market shall see additional iron ore volume of 21 million in the second half year, "and this hasn't taken into account of any additional supplies from the three major miners (BHP Billiton, Vale and Rio Tinto)."
Produced by China Business Intelligence; Source: www.sina.com.cn
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