By Wan Xiaoxiao, Yu De
Published: 2008-07-04

From Corporation Page 25 issue 374 June 30 2008
Translated by Liu Peng
Original article:

Disadvantaged by huge demand for iron at home and skillful media campaign by their counterparts, China reluctantly accepted a price doubling for iron ore after negotiations with Australian suppliers ended last week.

The 96.5% of price rise for next year was reached between Chinese Baosteel Group, who represented Chinese steel and iron companies, and Rio Tinto Group, the Australian mining giant.

Sources told the EO that part of the reason why Rio Tinto came out so well in the negotiations was strategic use of international media, through which it was able to influence the environment of the meetings and put the tight-lipped Chinese on the defensive.

BaoSteel has represented China's iron and steel businesses for several years, but has been criticized by those in the industry for poor timing in previous negotiations, sources told the EO.

Strategy in Negotiations
Ding Shouhu, the head of international coal trade department of BaoSteel Group, was appointed as the chief of the Chinese delegates.

After taking the post, Ding first initiated a three-month negotiation round with Brazil Companhia Vale do Rio Doce (CVRD) to reach a yearly contract price.

He went on to lead the recently-concluded iron ore price negotiation in Sanya Hainan province with Rio Tinto.

Ding faced pressures both from the increasing domestic demand for iron ore and the sharp rise in its international spot price.

To make matters worse, Rio Tinto had gone into the meetings asking for an 85%-90% rise in the contract price.

From February to May, the negotiations were dominated by the question prices. Chinese representatives were quick to point to a February deal between Nippon Steel Corporation and Brazil CVRD in early February, where iron ore supplied by the latter would increase in price by 65% or 71% over last year, depending on type.

But Rio Tito rejected those prices, which had in previous years served as a guide, and insisted on compensation for shipping fees.

BaoSteel was strongly dissatisfied, however, and through negotiations, Rio Tinto agreed to give up shipping compensation requirements.

Rio Tinto proposed a unilateral 85%~95% price rise, which left the negotiation in deadlock.

Meanwhile, Rio Tinto announced that it would reduce contract iron ore supplies while increasing spot supplies.

In response, Ding argued that the iron ore companies should buck for the long-term interests but not the temporary windfall profits.

By June 22, one day before the deadline, both sides were still in a stalemate. Finally, on June 23 BaoSteel released pricing decision.

"In fact, the beginning of the negotiations was highly advantageous to Baosteel. Because the two Australian companies were excessively bullheaded, Baosteel should have turned China's massive domestic demands into a price advantages, and open deep negotiations with Brazil CVRD," said a steel industry analyst who had been following on the iron ore negotiation.

However, when Baosteel negotiated with CVRD in February, Japanese and South Korean steel industry had already signed a price contract with CVRD, effectively setting the bar for next years prices for all. As a result, Baosteel was left in a passive position and had no choice but to accept.

Japanese companies said they would first observe China's negotiation process with the Australian iron ore giants, and would not jump into an agreement with them.

On January 30, a contract for 94 million tons iron ore was signed between BaoSteel and BHP Billiton, another Australian iron ore giant, which had nothing to do with the ongoing price negotiation.

Wielding the Media
BHP Billiton then leaked to the media that future contracts would leave flexibility to allow iron ore contract prices to respond to market conditions.

"Such news was misinterpreted by the Japanese steel companies and made them eager to finish the negotiation," the above analyst said.

Compared to the low-profile of BaoSteel Group, the two experienced Australian iron ore giants often took advantage of the international media.

"This is the usual tactic used by foreign companies in negotiations. Due to lack of experience, BaoSteel was always tight lipped and only restated its grounds, especially during critical periods in the negotiation. Furthermore, owing to ineffective communication with domestic media, BaoSteel was trapped in a deluge of unfavorable reports," said Xu Wanchun, a steel industry analyst.

In mid-March, foreign media hyped rumors that China manipulated importing licenses of iron ore and restricted importing the spot iron ore from Australia, thus creating an atmosphere that the Chinese government had intervened in the negotiation and that Australian iron companies had suffered unfair treatment.

On March 20, the Chinese side denied the rumors.

Since June, Australia's shipping freight to China had plummeted 31.53%, a record drop. Many industry analysts thought that BaoSteel should seize the opportunity to respond to the ocean freight compensation issue.

Nevertheless, foreign media reported that the freight drop was caused by Chinese steel companies jointly discontinuing chartered business from Brazil and Australia to China. As a result, Chinese steel companies were forced to guarantee that they hadn't been conspiring.

In the wake of the incident, the two iron ore giants gave an ultimatum to BaoSteel: "If Baosteel doesn't conclude the negotiations by the end of June, it must accept an 85-95% increase in the contract price. If not, they would give up the negotiation and only provided spot iron ores to China."

Finally, BaoSteel Group agreed with Rio Tinto's offer. BHP Billiton remained dissatisfied with the result, saying, "A huge price gap still exists between the contract price reached and spot price in the market."

A History of Being Beat
In 2004, BaoSteel, for the first time, represented Chinese steel companies in international iron ore negotiations. During the negotiation, Nippon Steel Corporation took the lead in reaching agreement of an 18.6% price rise with the international suppliers. As a result, BaoSteel had to accept this price rise in suit.

In 2005, when CVRD strongly demanded a double in the iron ore price, Japanese Steel Companies again lead with a 71.5% of price rise contract. Again, BaoSteel was forced to accept this price.

In 2006, after ThyssenKrupp AG signed a price rise contract with CVRD, Japanese and South Korean Steel companies also followed suit. BaoSteel delayed in the hopes of achieving a favorable contract price but finally had to again accept the pre-set 19% of price rise.

In 2007, in order to get the initiative, BaoSteel preceded to accept the offer of 9.5% price rise with CVRD. However, the agreement was criticized as rushed by observers and close to the upper limit of projected prices.

Though BaoSteel emerged battered, Xu Wanchun told the EO that "The Australian iron ore giants broke previously established negotiation rules, and thus it would negatively impact them in future negotiations."

It is still unknown that whether BaoSteel would continue to represent Chinese Steel Companies to lead negotiations in the near future.

However, that future is now just around the corner. Only half a year is left until the 2009 negotiations.