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Speculation costs China dear
2005-04-05
China Daily
China's ports may be filling up with iron ore stocks accumulated by traders, but the nation's steel producers have to accept skyrocketing price hikes imposed by international mining companies.
Su Yang, a customs official from Nanjing, the capital of East China's Jiangsu Province, said the province's ports were so full of iron ore that no more imports could be accepted.
A total of 4.56 million tons of iron ore flowed into Jiangsu in the first two months of this year, an increase in imports of 93 per cent year-on-year.
Iron ore stockpiles reached 37 million tons at ports across China by the end of last year.
Despite the massive stockpiles, Chinese steel producers faced 71.5 per cent price hikes for iron ore from top mining companies CVRD (Companhia Vale do Rio Doce) and Rio Tinto on April 1.
This strange scenario, partly a result of China's massive appetite for iron ore, was mainly created by China's numerous speculators, said Chen Haoran, chairman of the China Chamber of Commerce of Metals, Minerals & Chemicals Importers and Exporters (CCCMC).
This unreasonable price has even attracted the attention of the State Council - China's cabinet.
Premier Wen Jiabao told last week's State Council meeting that "direct" and "forceful" measures should be taken to counter the recent surge in iron ore prices.
The cabinet also approved a proposal to abolish a 13 per-cent tax rebate for billet steel exports. Cancellation of the tax rebate is expected to discourage billet steel production, thus reducing the nation's iron ore demand.
The Ministry of Commerce implemented a new automatic import system on iron ore before the removal of the tax rebate. This move was taken in order to check blind imports of iron ore.
Better with fewer importers
But Chen believed these government measures are not powerful enough to stop the abnormal price hike and bring an end to the disorder in iron ore imports.
These measure cannot alter the fact that China needs lots of iron ore to feed its economic expansion.
China currently consumes one-third of the world's iron ore annually.
China is also the world's largest importer of iron ore and its import volume soared to 208 million tons in 2004, 40.5 per cent higher year-on-year. And the average price surged by 86 per cent year-on-year.
"What we can change is the crazy price rise and the fact China, the largest buyer, has no say over pricing," he added.
He said these speculators, who import a large amount of iron ore on the expectation of future prices rises, do not care about the current price.
"Their crazy imports resulted in the extremely high prices offered by the international mining firms. Steel producers, who really need this raw material, have to swallow this bitter pill," Chen said.
"We are urging steel producers to form an alliance to obtain greater leverage and achieve lower import prices," Chen said.
The alliance would serve to dramatically cut the number of importers, Chen pointed out.
Chen's chamber of commerce has worked with the China Iron and Steel Association to devise tougher standards for importers.
Importers would be required to meet 10 criteria. The standards have been submitted to the Ministry of Commerce for review, although they will not have any legal force.
Chen said the standards, which may be introduced on May 1, allow only large enterprises to reserve the right to bargain in the world market.
"Finally, we may have only around 100 importers instead of the current 523," Chen said.
Steel producers would then be in a much stronger position when it comes to negotiating prices.
The standards have already been backed by 128 of the nation's 128 iron ore importers, accounting for 80 per cent of the country's total iron ore imports.
If successful, the price bargaining mechanism can be extended to other industries such as aluminium, oil, fertilizers and soybean.
BHP case
But opponents claim that such an alliance would be unlikely to achieve a big discount, given tight global iron ore supplies.
This gives the ongoing negotiations with BHP Billiton added significance, as they may prove to be an important acid test.
A total of 16 major Chinese steelmakers have joined forces in the price talks with BHP, another major international miner.
The 16 big steelmakers, including BaoSteel, Anshan Steel and Wuhan Steel, jointly turned down the Australian mining group's request that Japanese and Chinese steelmakers pay an extra US$7.5-10 per ton on top of the 71.5 per-cent rise.
BHP attempted to justify the price hike by claiming that Australian producers deserve a premium for the cheaper cost of freight from West Australian mines compared with more distant Brazil.
The landed cost of Australian iron ore was US$20 a ton cheaper than equivalent Brazilian ore.
Last month, BHP Chief Executive Chip Goodyear said: "We do not necessarily think that is a fair relationship," adding that it was an "important principle."
But China Iron & Steel Association official Yang Yi said BHP's request was unreasonable and out of line with business practices.
He said the 16 steelmakers have agreed to set up an iron ore importing sub-commission to promote further co-operation.
The sub-commission, expected to be officially launched on April 15, will act as a group in the future talks if the BHP case proves successful.
Futures prove a good tool
Some analysts said joint bargaining may be the best tool in the short term, while deeper involvement in the international futures market may be a better way to secure more reasonable prices in the long term.
Chang Qing, vice-president of the China Futures Association and the chairman of JIFCO, a futures company, said China has suffered huge losses from the improper use of futures.
"For the past two years in the international market, whatever goods China wants to buy, the price will rise accordingly; and whatever goods China wants to sell, the price will fall at once," he said.
He attributed this to Chinese enterprises' unfamiliarity with the way the international market operates.
"Foreign companies have a good idea of how to get a decent price by using the futures market," Chang said.
A huge number of management companies from every developed country take part in the international market, especially in the pricing markets for staple commodities and dealing in financial products.
With specialist teams researching and developing this business, they can conduct medium or long-term investment according to fluctuations in supply and demand, especially with regard to forecasts about forward supply and demand.
From 2003 to 2004, China's direct losses totalled 30 billion (US$3.62 billion) in soybean transactions because traders paid about 1,500 yuan (US$181) above the rational price per ton.
For copper imports, the loss is more than 10 billion yuan (US$1.21 billion).
Chang also suggested China's futures exchanges should trade in more goods, in an attempt to play a larger role in the international market.
The Shanghai Futures Exchange (SHFE) may reopen trading in steel futures for the first time in 11 years.
"The SHFE has submitted applications to the China Securities Regulatory Commission," said Xiao Hui, an SHFE researcher.
The capacity of China's crude steel production has been estimated at 333 million tons in 2005, while its steel demand could reach 270 million tons, Xiao pointed out. China produced nearly 30 per cent of the world's steel last year.
"Allowing trading in steel futures can help protect China's pricing rights on international steel markets, given that China has become a major steel producer," Xiao said.
In early 1994, futures exchanges in Shanghai, Tianjin, Chongqing and Beijing were approved to start wire rod futures, which were soon banned by regulators because of over-speculation.
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