Steel makers in the northern Shanxi province in northern China have broken ranks with other large Chinese steel companies by having reportedly signed 2009 long-term contracts for iron ore supply with foreign miners.

The move by the Shanxi province steel mills comes despite the China Iron and Steel Association (CISA) asking Chinese steel companies not to make individual contracts until the annual contract price for iron ore is settled with the three global mining giants.

The Southern Metropolis Daily, citing Zhu Fengliang, secretary general of the Shanxi Iron and Steel Association, said that many steel companies with a combined annual steel production of over 1 million tonnes from the Shanxi province had already jointly negotiated long-term supply deals with overseas miners.

It said these mills did not accept the 33-per cent price reductions that ore miner Rio Tinto had struck with Nippon Steel (See: Chinese steel makers reject new ore contract rate in Rio-Nippon deal) but managed a better deal although differences remained among the steel mill owners since they adopt different purchasing channels, but there was no further detailed information on the pricing aspect. 

The paper reported that Zhu Fengliang said that the steel mills have refused to reveal the contract price to the association citing confidentiality.

Earlier, 35 mills were reported to have signed 50 million tonnes worth of long-term iron ore supply contracts with Vale of Brazil, although the miner has not confirmed the deal.

CISA secretary general, Shan Shanghua insisted that China would not budge in its stance of seeking a 40-per cent cut in iron ore prices this year and added that the smaller Chinese steel mills have no right to sign long-term contracts with Vale.

It threatened that the contracts, even if signed will be invalidated and the import licenses revoked, since it undermined China's bargaining position with the global miners.

According to analysts, the steel association is actually in a quandary since many of the steel mills from the Shanxi province, which have negotiated separately with overseas miners, are reported to be state-owned steel makers.

This has not only come as a second severe blow but has become an embarrassment to the large steel makers in China and the CISA, which are locked in a fierce iron ore pricing battle with mining giants Vale of Brazil, BHP Billiton and Rio Tinto for this year's long-term iron ore prices. (See: Global iron ore miners locked in pricing battle with China)

Asian steel manufacturers had hoped to put up a united front to press for a 40 per cent reduction in prices from global miners for this year's benchmark iron ore annual contract prices.

Nippon Steel of Japan and Posco of South Korea, which had supported and backed China in seeking a 40-per cent rate cut with the three mining giants, changed tack last month and agreed to a 33-per cent price cut in the annual contract price for iron ore from Rio Tinto. (See: Chinese steelmakers upset with Nippon Steel's ore price-cut deal with Rio)

China's steel firms and the CISA have rejected the 33-per cent cut and had said in a statement that the price cut does not reflect the real supply and demand situation on the international market and would lead to overall losses for Chinese steel companies.

According to the CISA's deputy vice president Luo Bingsheng, during the first four months the steel industry made a loss of 5.18 billion yuan, with 29 of all medium and large mills suffered from losses.

With less than two weeks to go before last year's contracts expire between the miners and Chinese steel makers, the CISA said on its website last Thursday that it has recently "exchanged opinion on iron ore cooperation" with Brazil's Vale and Australia's Fortescue Metals Group.

According to analysts, there is a strong possibility of Chinese steel makers dumping Rio Tinto and BHP Billiton and either ink deals with other suppliers or rely on the spot market for its annual supply, since prices on the spot market is far cheaper than the demanding price of the miners.

China, the biggest importer of iron ore, has justified a price cut of 40 per cent on two counts. First, it says, iron ore prices have been raised by nearly 400 per cent in the past five years of the global boom that led to a demand for steel. Second, it says, the current demand for steel was unlikely to pick up this year due to the prevailing global recession and economic slump.