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China to launch first iron ore price index

By Zhou Xiaoyuan (People's Daily Overseas Edition)

16:02, August 04, 2011

The "China Iron Ore Price Index" compiled by the China Iron and Steel Association will be put into pilot operation in August and formal operation in October, the association said on Aug. 2.

The pricing power of iron ores has long been under the control of foreign mining giants. Despite its huge iron ore demand, China has little say in iron ore prices, and the development of its steel industry has long been curbed by foreign suppliers. Statistical data shows that the surge in iron ore import prices increased the costs of China's steel industry by as high as 104 billion yuan in the first half.

Industry insiders said that the compilation of the "China Iron Ore Price Index," China's first own iron ore index, will raise its steel industry's say in the iron ore market and provide the domestic steel industry with price references. This is a critical step toward structural reform in iron ore prices.

Price index to be updated weekly

Zhang Changfu, vice chairman of the China Iron and Steel Association, said that the "China Iron Ore Price Index" is made up of two sub-indices: the Domestically-produced Iron Ore Price Index and the Iron Ore Import Price Index.

The domestic iron ore price index is based on the prices of iron ore concentrates in 14 provinces, autonomous regions and municipalities as well as in 32 mining areas. The prices of imported iron ores are collected based on related data from the China Iron and Steel Association and the members of the China Chamber of Commerce of Metals Minerals and Chemicals Importers and Exporters, with references to the transaction iron ore prices at eight domestic ports. The weighted China Iron Ore Price Index will be released weekly.

The price index released by Platts, one of the three universally adopted indices in the world, has been widely used in China's spot iron ore market.

In 2010, the three global mining giants — Rio Tinto, Vale and BHP Billiton — announced the end of the long-term iron ore contract pricing mechanism and started adjusting iron ore prices monthly or quarterly according to price indices. This has made iron ore price indices an increasingly important factor in affecting iron ore prices, attracting widespread attention in the iron ore market.

The China Iron and Steel Association, China Mining Association and China Metallurgical Information Center have carried out extensive research to preliminarily develop a scientific, reasonable and reliable iron ore price index to better serve domestic steel companies.

China developed its own index for greater say in iron ore pricing

"China needs to develop its own price index to protect its own rights," said Li Xinchuang, deputy secretary-general of the China Iron and Steel Association, adding that although Platts' iron ore price index is widely used, it does not truly reflect the market supply and demand situation. The three mining giants use Platts' index simply because it serves their interests.

According to statistics from the World Steel Association, the world's iron ore exports reached 960 million tons in 2009, and Australia and Brazil together accounted for 67 percent of the total. China alone accounted for 65 percent of the world's iron ore imports that year, fully reflecting the Chinese steel industry's heavy dependence on imported iron ore.

The global iron ore market has been sluggish since the beginning of the year due to worldwide slumps in demand for ships that mainly transport iron ore. By contrast, iron ore prices have been rising in China despite the global trend, which was partly caused by International institutions' malicious speculation. The rising iron ore prices have led to considerable increases in the prices of domestic steel products, which are bound to affect China's national economy as the country launches its massive affordable housing program.

Mei Xinyu, a researcher at the Ministry of Commerce, said in an interview that China introduced the index for the purpose of evolving into a price setter. Although the country has a slim chance of gaining price-setting power under current circumstances, it must lay the groundwork for the future and grasp every opportunity to be a price setter for iron ore.

Chi Jingdong, vice secretary-general of the China Iron and Steel Association, told reporters that the reason for making this index is to enable the domestic iron and steel enterprises to dynamically learn the iron ore price fluctuation in the domestic market and clear up the market order for iron ore trades. The index has become a reliable index widely accepted by China's iron and steel enterprises.

The "China index" still needs improving

After all, China's action of making iron ore price index was already late. Previously, international authorities had already made arrangements and seized the dominant position for pricing the iron ore. Therefore, regarding the "China index," many people have showed their worries.

Chen Kexin, a member of the expert panel of the Lange Steel Information Research Center, believes that the founders of the three most influential international iron ore price indexes are all third-party organizations. They are neither iron ore enterprises nor iron and steel enterprises.

But China Iron and Steel Association, founder of the "China index," is not an independent profit-making organization, and global ore giants will inevitably question it as to why an organization with such a status could make the China iron price index. Therefore, China still has a long way to go for making the price index scientifically, let it reflect the market price objectively and practically, and turn it into a "China index" that is widely accepted by the international market.

"If the officially-made 'China index' could objectively and practically reflect the supply and demand relationship of China's iron ore in the future according to the current design, it will be able to gain the acceptances of some foreign organizations," Chi said.

Chi said that the iron and steel association's data-collecting channels for making the iron ore index are quite steady at this time. For example, regarding the imported iron ore, the contract price of every deal and the actual price after the ore reaches a steel factory are both major data resources for making the index.

Chi also said that once the "China index" has become a convincing index in the market, both the international and domestic iron ore prices will no longer fluctuate so dramatically. Then, foreign organizations will select the price-setting mode based this index, and domestic iron and steel factories will also be guided by this index to adjust their production according to the state of market.

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