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Five lessons for China's iron ore negotiations
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17:08, August 11, 2009

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 Ore: the "greatest pain" for China steel industry
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Although China is one of the world's large iron and steel producing countries, it has long been controlled by others in negotiations over iron ore imports. There are five main reasons for this, including espionage activities, said He Weida, professor at the School of Economics and Management at Beijing University of Science and Technology, to the overseas edition of the People's Daily.

High output at the expense of high cost

According to statistics, since 2000, China has contributed around 78 percent to the overall growth of global steel output. In 2005, China's steel output reached nearly 350 million tons, almost the equivalent of the total combined output of Europe and Japan.

As the world's largest iron ore importer, the price of iron ore imported to China in the years between 2005 and 2008 increased by 71 percent, 19 percent, 9.5 percent and 96 percent respectively. An expert pointed out that the price rises in these five years increased the expenditure of China's steel enterprises by 700 billion yuan, which is more than double the total profit of these enterprises during the same period.

Five lessons

Firstly, the steel industry is not highly concentrated and competition is severely disorderly. Although China is currently the world's largest buyer of iron ore, the industry concentration of China's steel industry is far lower than that of the US, Japan, India and South Korea because China has a large quantity of steel enterprises and most of them are small.

Secondly, China's steel enterprises lack experience in this type of negotiation and are unable to respond quickly to changing circumstances. Steel enterprises in Japan and other countries have accepted price rises mainly because some of their large enterprises hold shares in iron ore companies and the added-value of their products is relatively higher, therefore price rises have not influenced them significantly. However, China's steel enterprises have relatively low product added-value in general, so price rises have a relatively greater impact. In addition, the negotiators of China's steel enterprises drafted terms and clauses in advance, but failed to respond quickly to changing circumstances.

Thirdly, there is a lack in international iron ore pricing rights. China has become a global processing and production center leading production, but cannot determine the price of raw materials. This is a very abnormal phenomenon. Therefore, along with domestic united combat, China should actively ally with Japan, South Korea and other large steel producing countries to form a combined internal and external force.

Fourthly, the import channel for iron ore is too narrow. At present, China imports iron ore mainly from Australia, Brazil and India, and in particular from the Australia and Brazil-based three iron ore giants. Therefore, China should cooperate to develop iron ore resources in developing countries to reduce its dependence on these three iron ore giants.

Fifthly, economic spies working undercover in China's iron ore negotiations have always existed. The recent Rio Tinto case showed that the rival not only knew everything about China's negotiation plans, but were also very familiar with the economic situation of China's steel enterprises.

By People's Daily Online



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