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【Steely。裕幔欤耄蟆縏ED Talks

發(fā)布時間:2020-03-26 來源: 人生感悟 點擊:

     Negotiations on prices of iron ore, used in making steel, are routine for China every year, but the process this year took much longer than ever before. It was only recently that the negotiations, which typically end in late March, were concluded.
  Although China insisted that the pricing decision must take its market situation into account and even insisted that an additional month of talks take place after European prices took shape, the Chinese side still accepted a 19 percent increase in iron ore prices following a 71.5 percent jump last year.
  During this year’s negotiations, China’s “voice right,” or right to negotiate, was fully embodied. Many suppliers chose to hold talks with Chinese enterprises first, and many buyers from Europe waited for the negotiation of an acceptable price. But “voice right” is not equal to a “price-decision right,” or the right to determine prices, so that “Chinese demands” did not become “Chinese prices” in the end.
  
  China’s market position
  
  In recent years, China’s steel and iron industry has had a rapid development. Since 1996, China’s output of raw steel has been the largest in the world. According to statistics from the International Iron and Steel Institute, in 2005, the world output of raw steel was 1.13 billion tons, while that of China reached 350 million tons, increasing 24.6 percent from a year earlier and accounting for 31 percent of the global output.
  China’s per-capita reserves of iron ore are only 42 percent of the world average but output and consumption both exceed the global average. Because domestic iron ore resources are not sufficient, imports have become an important source for the Chinese iron and steel industry. In 2003, China became the largest iron ore importing country, exceeding Japan and the European Union. In 2005, China imported 275 million tons of iron ore, accounting for 43 percent of the global volume transported by ship.
  At present, China imports iron ore from almost all countries that produce the metal, but imports are becoming more concentrated. In 1995, China imported iron ore from 23 countries and from 43 countries in 2004. However, the percentage of imports from the three main producing countries increased to 83.8 percent in 2004 from 26.8 percent in 1995. More than 90 percent of iron ore is imported from Australia, Brazil, India and South Africa, about half of that under long-term contracts.
  The international iron ore market determines prices through yearly negotiations, using certain long-term trade agreements as its main price-setting mechanism. According to convention, the new fiscal year’s iron ore prices are decided before April of every year. During the process, the largest iron and steel enterprises, acting as industry representatives, negotiate with iron ore suppliers to form the basic prices for European and Asian importers. For a long time, Japan set the standard for Asia.
  The long-term supply contracts and yearly price determination enable the industry to maintain relative stability, and allow both suppliers and buyers to make rational decisions. However, as the biggest buyer of iron ore in the world, China has the capability and right to influence iron ore prices. After having to accept the Japan-determined price, a 71.5 percent hike and pay $3 billion more for imports, China’s iron and steel industry has deeply understood the importance of the “price-decision right.”
  
  During this year’s negotiations, Chinese iron and steel enterprises faced more serious market issues than their foreign counterparts.
  In 2005, the long-term benchmark price of iron ore increased 71.5 percent, making the costs of steel products surge. However, in China, the production capacity of such lower-end industries as automobiles, housing, appliances and communication equipment is adequate and in some industries supply exceeds demand. According to research data, in the second half of 2005, among the 600 main consuming products in China, 71.3 percent had the problem of oversupply, 28.7 percent had a balance of supply and demand, and there were no products whose demand exceeded the supply.
  The difficult situation of lower-end industries and the fierce competition in the international steel market mean that steel prices in China are lower than those in other regions. From the second half of 2005 until the beginning of 2006, steel prices fell globally. In the first quarter of this year, the European steel market began to emerge from its ebb, and by April international steel prices approached the high point of last year.
  At the same time, the Chinese steel market is still in a difficult position and steel prices are far lower than the international average and last year’s levels. In 2005, the profits of the entire Chinese iron and steel industry declined. Profits of the 66 large and medium-sized steel enterprises that are included in the statistics of the China Iron and Steel Association decreased 10.62 percent from 2004, while the decline for the 10 largest listed enterprises was more than 50 percent.
  On this basis, the China Iron and Steel Association and iron and steel enterprises realize that China must not accept pricing decisions that disregard China’s market situation. Before the negotiations with Brazil and Australia, China met with India, which is the largest spot supplier to China, trying to add more weight to the negotiations with Brazil and Australia.
  In recent years, aside from metal purchased under long-term contract, China’s blossoming demand has created an important spot market, in which a product is purchased for immediate delivery, and India is the most important spot supplier. Although the spot market accounts for less than 20 percent of the global trade volume, prices are much higher than the benchmark prices, and the market is having more and more influence on the annual price negotiations.
  In 2004, the benchmark prices for iron ore were $20-30 per ton, while spot prices were about $60 per ton. In the second half of last year, spot prices of some iron ore hit $100 a ton, showing an immediate effect of the 71.5 percent rise in benchmark prices. In 2004, India, surpassing Brazil, became the second largest source of imported iron ore for China. In 2005, iron ore imported from India exceeded 50 million tons, accounting for nearly 20 percent of China’s total import volume, with all transactions done on the spot market.
  
  During the benchmark price negotiations this year, China tried to negotiate a long-term supply agreement with India to guarantee that it would get the iron ore at certain prices and to add more weight to the negotiations with Brazil and Australia. China’s efforts did not succeed, however, and this influenced the following rounds of negotiations with Brazil.
  
  Negotiating strategies
  At the beginning of the negotiations, enterprises from Europe, Japan and South Korea all sought a reduction in iron ore prices. However, with the pickup of prices in the European and international markets, their voices became weaker. Besides, China’s domestic steel output and prices also showed an unexpected large rise. China did not grasp the chance to form alliances with other countries and lost the opportunity to set up its own “price-decision right.” On the contrary, those suppliers grasped the chance and put China in a plight. Noticing that most European steel plants use iron ore pellets, suppliers took the lead in making an agreement that the price of iron ore shavings would increase 19 percent while the price of iron ore pellets would decrease 3 percent, leaving China in a passive situation.
  Another factor undermining China’s negotiating basis is that importers in China are not united. Because of the large number of steel-producing enterprises and the reform of the foreign trade system, the number of iron ore importing enterprises in China has sharply increased, reaching 523 in 2004 from 173 in 2001. However, the three major suppliers―Brazil’s Companhia Vale do Rio Doce and Australia’s BHP Billiton and Rio Tinto―control 70-80 percent of global iron ore production and ocean shipping trade. This situation, in which the buyers are overly decentralized and sellers relatively centralized, is unfavorable to China’s iron and steel enterprises.
  The China Baosteel Group, representing China’s iron and steel enterprises, negotiated with the three magnates. However, at the same time, small and medium-sized steel plants and importers were still buying a large quantity of iron ore from the spot market at prices higher than the benchmark prices, embarrassing the negotiating representatives, who insisted that China’s demands for iron ore had slowed down and that China’s steel enterprises could not bear further iron ore price increases.
  
  Market influences
  
  In fact, the 19 percent price increase has not had much influence on the production costs of iron and steel enterprises―the rise was equivalent to $7-8 per ton. Because ocean freight costs have dropped $8-10 per ton from the same period last year, the actual cost to the buyers of shipping iron ore may actually decline. The price of coke, another primary material for iron and steel production, has declined substantially, so that the costs of iron and steel production have not shown a major change. However, the increase will still force Chinese iron and steel enterprises to pay over 10 billion yuan more than the predicted price standard.
  
  The structure of China’s iron and steel industry is decentralized and product grades are low in general so that the capacity of China’s enterprises to earn profits is lower than their foreign counterparts. In terms of market competition, Chinese iron and steel enterprises always prefer to compete on price. Hence, given the current situation of low domestic steel prices, the increase in the cost of purchasing iron ore will undoubtedly further reduce the profits of China’s iron and steel enterprises and weaken their competitiveness.
  Besides, many foreign iron and steel companies have their own mines. Mittal Steel, the world’s largest iron and steel enterprise, for example, owns a sufficient number of mines to meet its raw material needs, forming a vertically integrated production system. Japanese enterprises have invested in all 24 major mines in Australia so that the rise in iron ore prices has no influence on Japanese iron and steel enterprises by and large. Although China’s Baosteel Group and Shougang Group have also participated in exploiting iron mines in Australia, Mongolia, Viet Nam, South America and some countries in Africa, this is not enough for Chinese iron and steel enterprises.
  In the later stage of the negotiations, Companhia Vale do Rio Doce, which firmly insisted on raising iron ore prices, said China’s position in the negotiations will be identified in the next year and China has the potential and right to be the Asian price setter instead of Japan. In fact, during this year’s negotiations, suppliers expressed their respect for China: six of the seven rounds of negotiations were held in China; after Europe, Japan and South Korea agreed to accept the price hike, they still continued to negotiate with China for nearly one month. However, there are still many things China must do to change “Chinese demands” into “Chinese prices.”
  The negotiations have ended and China’s iron and steel enterprises have learned many lessons from them. These can be applied to purchasing other materials from other countries, including copper, aluminum and even oil. If it wants to have reasonable prices and guaranteed supplies, besides studying negotiating countermeasures, China needs to improve itself in the following two aspects:
  First, China should accelerate industrial unification, improve industrial concentration and guarantee the adequacy and transparency of information to remove market bubbles.
  Second, China should set up stable and decentralized material supply channels to break the situation of excessively depending on some suppliers who have formed monopoly positions and form its own supply channel system. Owning mines is the most reliable way.
  By the end of the iron ore negotiations, the China Iron and Steel Association and China Chamber of Commerce of Metals, Minerals and Chemicals Importers and Exporters issued a joint statement, planning to further reduce the number of importers to 99 from the current 118 by raising the market access threshold. During the negotiations, Chinese iron and steel enterprises bought iron mines in Australia and Gabon. Improving the concentration of the iron and steel industry, increasing domestic reserves and strengthening overseas resources are the means for strengthening China’s price negotiating capacity. Today, China’s iron and steel enterprises realize that besides negotiating tactics and skills, the industrial strength behind the negotiations is the most important factor for changing negotiating patterns.

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