Australia and China have always made for uneasy relationships. Just over a century ago the Australians tried to wipe out the Chinese from their lands with the legislated White Australia Policy. Its chief Architect, Alfred Deakin had said – “It is not the bad qualities, but the good qualities of these alien races that make them so dangerous to us. It is their inexhaustible energy, their power of applying themselves to new tasks, their endurance and low standard of living that make them such competitors.”
The Chinese would say so otherwise to this politically polite and probably cultural un-saavy statement.
Today, China and Australia have a relationship that is so intertwined. China needs Australia’s resources to build its cities and infrastructure, and Australia’s chief export is its resources. Is there a legacy issue at the back o of some minds involved in these uneasy times? I would think so. Not fully, but at the back of some minds.
People outside of China will not know this – but switch on your TVs and tune into any one of China’s political satirists and hear what they have to say. With audiences queueing up for months on end to hear what these satirists have to say about China’s place in the world today, the growing number of people reminded of how China was bullied in the past is phenomenal. And remember, in China, phenomenal numbers really really means phenomenal relative to what most of us are used to.
“I understand there is a lot of internal pressure in China to get a new benchmark agreement to shield it from further increases in the spot price.” Phillip Price, steel editor at Metal Bulletin.
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Tense times in Chinese iron ore price talks
By Will Smale
Business reporter, BBC News
Source – BBC, 20 Feb 2010
Due to stand trial in China, Stern Hu knows just how sensitive the country is about how much it pays for the vast iron ore imports its giant steel industry needs.
Mr Hu, an Australian national, is the head of the Anglo-Australian mining group Rio Tinto’s iron ore business in China.
He and three Chinese colleagues – Wang Yong, Ge Minqiang and Liu Caikui – were arrested in July last year and subsequently charged with bribery and violating commercial secrets. They are now set to go on trial later this year.
The four are accused of spying on Chinese steel mills for six years, and in the process helping to inflate the price China pays for its iron ore imports. Rio Tinto strongly denies the accusations.
The arrests of the four came last year as China failed to agree already overdue 2009/10 annual iron ore prices with the world’s three largest producers – Rio, fellow Anglo-Australian miner BHP Billiton, and Brazil’s Vale.
With talks now starting for the 2010/11 financial year that begins on 1 April, China’s ill-tempered approach appears to be continuing.
The three main iron ore firms negotiate benchmark prices separately. Photo: AP
Earlier this week, Wu Xichun, the chairman of the China Iron and Steel Association (CISA), the industry body that organises the Chinese representation at the separate negotiations with Rio, BHP and Vale, verbally attacked reporters who questioned how this year’s talks were likely to proceed.
“Please don’t report on it any more, you’re not doing us any favours,” the Reuters news agency reported him as saying.
“So don’t ask me anything about iron ore talks!” he shouted. “Nobody from CISA will tell you anything about it.
“You’d better not waste your time and keep on prying.”
High drama
So why is China being so jittery?
Unlike any other raw metal, the worldwide price of iron ore is primarily set on an annual basis.
This process – the establishment of global annual “benchmark” prices – has traditionally been of benefit to both the iron ore miners and the steel companies, as it introduces long-term stability to what has always been a sector prone to boom and bust.
The way it has worked in recent years is that the three miners each negotiate separately with Japan, South Korea and China – the world’s three largest iron ore importers – and the first to agree a price with one of these countries sets that year’s benchmark, which the other two then broadly follow.
With billions of dollars at stake, it is a game of high drama and huge implications.
The system failed last year because China refused to accept the benchmark deals agreed by South Korea and Japan, which themselves were not signed until June – three months late.
While South Korea and Japan negotiated a price cut of approximately 30% in the face of the then global recession, China said this was not enough, and so refused to follow suit.
The problem this time around is the opposite. With global steel demand and prices now soaring again as the worldwide economy continues to recover, the negotiations will centre on how much iron ore prices need to rise, with some analysts predicting the miners may call for a 40% increase.
And with China now the world’s largest steel producer – accounting for half of global production in 2009, up from 38% in 2008 – its position is vital for both sides. China needs the iron ore, and the miners need its business on favourable terms.
Such is the importance of securing a deal with the Chinese, analysts say it is important to note that Rio last week appointed a new boss in China.
Rio has appointed Ian Bauert, a fluent Mandarin speaker, as its new managing director for China.
Rio’s chief executive Tom Albanese said in a statement that his appointment “underlines the importance the company places on enhancing its relationship with China”.
‘Soaring demand’
Source - The Steel Index
To secure the extra iron ore imports it needed last year from outside the benchmark agreement, China turned to a recent development in the sale and purchase of iron – the “spot” market.
In essence, this is the trade of iron ore on the open market, with the spot price of iron ore going up and down on a daily basis, in the way that other raw metals are traded. Four years ago, only 4% of iron ore was available to buy on the spot market, but this has now risen to about one third.
However, China cannot rely solely upon the spot market for two main reasons.
Firstly, the price of spot iron ore has soared 65% over the past year to about $123 per metric tonne this week.
This compares with the $70 to $75 per metric tonne benchmark prices that Japan and South Korea agreed last year.
Analyst Patrick Flockhart of Steel Business Briefing says the spot price will only rise further this year.
“The spot price is rising strongly because steel demand is soaring globally, with even the steel market in Europe picking up,” he says.
“As a result, the supply of iron ore is going to be tight in 2010. Demand is stronger than supply again.”
With spot prices expected to keep rising, it is financially vital for China to be able to agree a new benchmark price at or around the current spot price level.
Secondly, China cannot gain all the imports it needs through the spot market.
Which brings us firmly back to the importance of this year’s benchmark price negotiations, which Rio, BHP and Vale are – as ever – refusing to comment on.
“There is a risk of China not settling again this year, but I imagine it will certainly try to,” says Phillip Price, steel editor at Metal Bulletin.
“Since last year’s benchmark settlement, the spot price has risen quite considerably.
“I understand there is a lot of internal pressure in China to get a new benchmark agreement to shield it from further increases in the spot price.”
Mr Hu, in his cell in Shanghai, must be hoping that China’s talks with Rio go well.
Filed under: Australia, BBC, Environment, International Relations, Resources
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