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CISA: first iron ore "China price" is win-win
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16:33, August 18, 2009

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The half-year contracted iron ore price signed by China's steel enterprises and Australia's Fortescue Metals Group Ltd (FMG) represents the first "China price" that the China Iron and Steel Association (CISA) has achieved during this round of global iron ore negotiations, said Liu Zhenjiang, CISA deputy chairman. This result is relatively reasonable, objective and decided on the basis of the market. It can be accepted by both buyers and sellers and is favorable to both of them.

Most importantly, this price indicates a significant step forward in exploring the establishment of a "China model" for negotiations of imported iron ore prices.

A notice issued by the CISA on August 17 announced that China's steel enterprises represented by Baosteel Group have concluded the following agreement in terms of imported iron ore prices in the second half of 2009 with Australia's FMG: rocket fines (on an FOB basis) for 94 U.S. cents a dry metric ton unit (dmtu) and iron ore lumps (on an FOB basis) for 100 U.S. cents a dry metric ton unit (dmtu), a price drop of 35.02 percent and 50.42 percent year-on-year respectively.

Some analysts believe that the results of the negotiations have achieved three breakthroughs. Firstly, a 35 percent cut in iron ore prices is higher than the 33 percent price cut offered by Australia's Rio Tinto to Japan's Nippon Steel Corporation. The gap between the two price cuts is not large, but China has extremely high demand, accounting for more than half of the world's total maritime iron ore trade volume. That means that the price cut is not simply related to enterprise profits; China would incur increased expenditure of 500 million USD if the price of iron ore is increased by one USD per ton.

Secondly, FMG has promised to sell iron ore to China's steel enterprises at a unified price. That has met the CISA’s requirement of putting forward a national unified iron ore price. Previously, there were two types of imported iron ore prices in China, long contract prices during contracted periods and on-the-spot trading prices. On-the-spot trading prices are caused by the fluctuation of the market prices.

Due to the co-existence of the two price types, China's iron ore import market is disorderly. This year, in order to change the situation, the CISA is promoting the establishment of a unified iron ore import price in accordance with international practice.

Thirdly, the concluded agreement shall be valid from July 1 to December 31, 2009, lasting half a year. This has broken the previous pricing model of one-year contracts. The new mechanism will cause international steel prices to fluctuate at a larger scale; however it may make the pricing negotiation process more transparent.

At the same time, Hunan Hualing Steel Group has become FMG's second largest stockholder, with 17 percent of FMG's shares. FMG started participating in iron ore negotiations in 2008 as Australia's third largest iron ore supplier. Although it has a relatively small supply volume, it has helped China's steel industry take a big step forward in entering overseas mining companies.

By People's Daily Online

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