China's steel mills may boycott BHP's ore; dismiss price rise

The Chinese government and steel industry officials are looking at boycotting iron ore imports from BHP Billiton in order to pressurise the Anglo-Australian miner to rethink a somewhat steep price rise, according to a report in the South China Morning Post. BHP is asking for more than the almost 100 per cent hike mainland Chinese steel-makers had agreed to pay BHP rival Rio Tinto.

Rio Tinto secured an average 85 per cent increase in contract iron ore prices with Chinese steel maker Baosteel. The South China Morning Post reported an unnamed China official as saying that an agreement with BHP could be in the offing, though any attempt by BHP to link long-term contract prices of iron ore to higher spot prices would be rejected.

Sources indicate that the larger steel companies were prepared to see a hike, and have shrugged off the impact of the record rise in iron ore prices. However, they say higher prices of the ore would increase cost pressures on smaller steel makers, and hasten consolidation in the industry.

Analysts say the average 85 per cent hike in prices agreed Anglo-Australian miner Rio Tinto was within the range of expectations, as Chinese mills had been expecting a price rise of a minimum of 65 per cent as agreed with Brazilian miner Vale earlier this year.

They say smaller Chinese mills could be impacted if the pricing agreement leads to higher spot prices, as smaller mills buy ore on the spot market and are unable to lock in prices by annual contract. That is also the explanation given for the Chinese government wanting to consolidate the industry, so that everyone can buy on contract and enhance the collective bargaining power.

Dan DiMicco, chairman, president and chief executive of US steel maker Nucor Corp told a conference that he expects the price of steel-making raw materials like iron ore, coal and scrap metal to continue to rise for several years, keeping pressure on manufacturers and consumers. He said iron ore is up several hundred per cent, scrap prices are ranging between $600 to 700 per ton, pig iron is at $900 per ton, and coal is rising several hundred per cent ''even as we speak,'' while addresing the American Metal Market's steel success strategies conference.

Marcus Randolph, chief executive for ferrous and coal businesses at BHP, has also said that "delighted to see the progress" on prices, but added the company wasn't being paid "the same price as somebody else is for their similar product delivered to China," the report in The South China Morning Post said. Randolph says freight costs for shipping a ton of iron ore to China from Australia are around $55 to $60 below the cost of shipping from Brazil.

Analysts estimated the differential in shipping between Brazilian and Australian iron ores at $53 a ton on the spot market, and $27 a ton.

Media reports though the week have been saying that China's largest steel producer Baosteel Group had agreed to an average increase of 85 per cent in the benchmark price of iron ore supplied by Rio Tinto. That was over the precedent set by the premium charged at the 65 to 71 per cent iron-ore price increase that Chinese steel manufacturers and Brazil's Vale negotiated earlier in the year. Japanese steel makers had also come to a similar arrangement with Vale.