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Any overt efforts by Beijing to influence iron ore prices would probably deal the coup de grâce to the decadesold annual benchmark pricing mechanism, which is already on the brink of collapse because of increasingly volatile market conditions and the growth in the spot market, analysts say.
The China Iron & Steel Association and the heads of more than 10 mills wrote a joint letter to Prime Minister Wen Jiabao on March 11, the official China Securities Journal has reported, asking him to take up the issue of rising iron ore import prices at the national level.
With the British-Australian mining company BHP Billiton highlighting the 100 percent difference between spot and contract prices and Vale of Brazil demanding a 90 percent increase in contract prices, the Chinese steel industry is worried about exploding costs that they say cannot be passed onto customers.
‘‘We recognize China’s market economy status; all we ask in return is that it acts in accordance with market principles,’’ Simon Crean, the Australian trade minister, said at a news conference.
He added that Chinese steel makers, locked in talks with Australia’s two biggest iron ore miners, Rio Tinto and BHP Billiton, over the pricing of hundreds of millions of tons of ore for delivery over the next 12 months, ‘‘should not seek to get government involved.’’ Last year, the leadership of ore negotiations by the government-backed China Iron & Steel Association, and in particular its much-trumpeted demand for more favorable price terms than for other Asian mills, left the benchmark system in tatters.
The companies seeking the Chinese prime minister’s intervention included Baosteel, Wuhan Iron & Steel, Anshan Iron & Steel and Hebei Iron & Steel, according to The China Securities Journal.
‘‘The steel mills are caught between a rock and hard place, but it’s of their own making,’’ said Mark Pervan, the senior commodities analyst at Australia & New Zealand Banking Group. ‘‘Their overcapacity has created huge demand for iron ore. Beijing wasn’t prepared to make the tough decisions to consolidate and cut capacity, so it’s been left to the market to make the decision for them through higher prices.’’ Chinese mills are not alone in voicing concern that iron ore prices may skyrocket this year as global industrial activity rebounds. The European steel industry group Eurofer said last week that price increases of 80 percent to 90 percent that have been forecast by analysts could hurt the European economic recovery.
Spot market prices for iron ore have soared above $130 per ton, double the contract price for 2009-2010.
The annual negotiations have previously taken on a political angle, with relations between China and Australia strained by the arrest last year of four members of Rio Tinto’s iron ore negotiating team and by the often contentious Chinese bids for stakes in Australian producers.
Some of the strain was eased by a report by China that cleared Rio Tinto and Australian government of blame for the collapse of Chinalco’s proposed $19.5 billion investment in Rio Tinto last June.
‘‘Objectively speaking, the failure of the merger between Chinalco and Rio Tinto lies in the rapid recovery of the world resources market, including the related stock market, whichwas beyond everyone’s expectations,’’ the Chinese report said, according to The Age newspaper in Australia.
Mr. Crean, the Australian trade minister, said the report should help heal Chinese-Australian relations and that Australia continued to welcome foreign investment to help expand its iron ore production.
Rio Tinto had no immediate comment on the report, and BHP declined to comment on it.
Lu Youqing, Chinalco’s vice president, said he had not read the report but added: ‘‘The case is over. We have analyzed it already.’’
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