China rhetoric again attacks iron ore pricing

Workers walk past an iron ore storage site at Yingkou Port, one of China's biggest ports for the import of the commodity, Liaoning province, June 10, 2010.

DALIAN, China (Reuters) - Iron ore prices should follow steel prices, not the other way round, a spokesman for China's steel industry said on Tuesday, reopening a war of words over who sets the price of China's biggest import commodity.

China is by far the world's top steel producer, with almost half of global production in 2009, so using steel prices to guide iron ore prices would give it a large measure of control over the cost of the ingredient globally.

"I view iron ore as an intermediate ingredient that only has value because it is processed into steel by the steel industry," Shan Shanghua, secretary general of the China Iron & Steel Association (CISA), told a conference in the Chinese port of Dalian.

But such a drastic reversal of pricing power is unlikely to be accepted by the trio of top miners, who can exploit the lack of unity in China's fragmented market, which has thousands of steelmakers, most not members of CISA.

CISA, which represents 78 of China's top steel mills, has been fighting the pricing battle for years, determined to get an upper hand in negotiations with the big three miners, Vale SA, Rio Tinto and BHP Billiton.

Tensions peaked last year when CISA failed to clinch an annual pricing deal and a Shanghai court jailed four Rio Tinto(RIO.L)(RIO.L) employees, including Australian citizen Stern Hu, for stealing commercial secrets and taking bribes.

Their arrest at the height of fraught term iron ore price negotiations in 2009 strained ties between Australia and China, and shocked the Chinese steel industry.

"A great part of my time has been stabilising our business here, and rebuilding our Shanghai office," Warwick Smith, managing director of sales and marketing at Rio Tinto's iron ore division, told the conference, organised by CISA.

"Quite simply, Rio Tinto is back on track."

QUARTERLY PRICING

CISA's failure to reach an iron ore pricing deal last year helped bring down a decades-old system of annual benchmark pricing, but miners and mills have yet to settle on a universally accepted replacement.

Big Chinese mills such as Baoshan Iron & Steel Co Ltd have moved to quarterly pricing, but some miners favour prices that fluctuate more rapidly, such as price indexes.

"Our position for this fiscal year has been to give the quarterly pricing system a chance to operate this year," Smith told reporters.

"To change to monthly pricing right now after changing from the annual to quarterly systems would be destabilising."

He added they were in discussions with Asian clients but not "forcing" anyone to move to a shorter pricing system.

So far, Asian mills prefer quarterly pricing, said Jose Carlos Martins, executive director of marketing, sales and strategy at Vale, which struggles with higher shipping costs as it competes with Australian rivals in Asia.

Martins said Vale has no preference for quarterly over spot prices, since its ore quality offsets higher shipping costs.

Shan railed against iron ore pricing indexes, which he said reflected only a small portion of the iron ore trade that passed through the spot markets, and therefore should not be the determinant of seaborne iron ore prices.

"Spot trading is mostly through small mills and therefore not representative of the market."

Investigators had found evidence of collusion between end-users and traders to fake spot import contracts, he said.

Shan said iron ore imports would fall this year, with domestic production expected to exceed 1.1 billion tonnes, adding that 100 million tonnes of steel scrap expected to be generated this year and more in the future would help mills cope with high ore prices.

China has boosted its own iron ore production in the last five years in a bid to displace some of its imports. But industry experts say China's iron ore quality is far lower than that of imports.

Australia is China's top source of imported iron ore and a major investment destination for Chinese companies, including steel mills, many of which have stakes in iron ore mines there.

Australia's Ambassador to China, Geoff Raby, said Chinese steel companies should consider setting up mills in Australia, since they had interests in local iron ore and could get ready access to coking coal and energy such as natural gas.

But Australian iron ore costs could also rise because Australian Prime Minister Julia Gillard has proposed a 30 percent tax on coal and iron ore mining profits from 2012.

Shan said Chinese mills would refuse to pay more because of the tax.

"Chinese steelmakers will not be able to accept rising costs from the Australian iron ore mining tax as steel prices will reach a ceiling, and downstream users including automakers and producers of home appliances won't absorb rising costs," Shan told Reuters.

(Additional reporting by Sussy Shao; Editing by Chris Lewis and Manash Goswami)

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