Future grim for Chinese steel mills
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Chief executives of major steel producers all acknowledged the existing iron ore problem and confirmed all the steel mills in China has had "temporary pricing plans" with the three mining monopolies – Rio Tinto, BHP Billiton and Vale.
"Each steel mill has its own temporary deal with the mining companies, either quarterly or monthly pricing plan, otherwise how are we supposed to keep production?" said Shen Wenrong, chairman of Shagang Group in Jiangsu Province. He added that Shagang had stopped iron ore imports because the price was already unacceptable. His company relies heavily on the iron ore stock.
Shen said Shagang stopped imports when the iron ore price reached US$170 per ton. After shooting up to US$190, the price fell back. He said the steel mills that make purchases now are sustaining losses from the very beginning.
If the price doesn't fall, Shagang would rather "reduce or completely halt production," Shen said without revealing his stock volume. "If the situation doesn't change it's about time to reduce production."
Shagang's own iron ore mine in Australia has already started production with an annual output of 3 million tons. "We plan to raise the production to 10 million tons a year as early as 2013. Our long-term goal is even beyond that."
Baosteel's chairman Xu Lejiang Sunday admitted for the first time he also signed temporary pricing plans. "Temporary settlement is the only way to exist," he said. Whatever the result of the iron ore negotiation, the higher price is a trend expected to continue.
During this year's negotiation, the Chinese steel industry hopes to maintain the long-term contract, whereas the three mining giants insist on the quarterly pricing plan. China Iron and Steel Association is still trying to make the bargain work and simultaneously expressed understanding of steel companies that have been subjected to the short-term contracts.
Besides the temporary pricing plans, local governments are standing in the way of the steel mill expansion, since they facilitate mergers and acquisitions within their prefectures but reject takeovers or even capital rejection from outside in order to form reorganization. Up to now, "there hasn't been a real market-oriented merger in China's steel business," Xu Lejiang said.
The mergers within the province, though intended to raise competiveness, prevent takeovers from other regions. Xu expressed disapproval, saying these acts affect steel industry expansion and initiate a regional monopoly.
As a result of the recent policy to cool down the real estate market, the steel business has felt the chill. Construction accounts for half of China's steel consumption, and China's steel price closely followed that of the property price.
With last year's 4-trillion stimulus package nearly spent, and the government determined to squeeze the property bubble, steel makers in China are seeing a gloomy future.
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