The Secret of China's Iron Ore Negotiations

By Yu De, Hu Yilin
Published: 2009-07-22

Corporation, page 25
Issue 427, July 13
Translated by Tang Xiangyang
Original Article:

Earlier this month, the Shanghai State Security Bureau detained Stern Hu, an Australian citizen and Rio Tinto's chief iron ore salesman in Shanghai, along with three of his Chinese colleagues. They are accused of stealing sensitive data related to China's iron ore price negotiations.

In addition to the four Rio Tinto employees detained on accusations of spying and commercial espionage, other Chinese steel makers are now being implicated in the growing "Rio Tinto spygate" scandal.

Recent reports revealed that a Shoudu Iron and Steel Group executive had been detained and that employees of the Jigang and Laigang steel companies had also been questioned.

Last week, The Economic Observer learned from various industry insiders that high-level executives at Baosteel, the largest of China's iron and steel groups, had also been "invited" to help authorities with their investigation. At the time of going to print, Baosteel officials had not responded to the news, but they have since denied that any of their employees had been involved in the investigation.

Reports in last Wednesday's China Daily went further, they quoted industry insiders as saying that executives of all 16 of the major Chinese steel mills participating in this year's iron ore negotiations had received bribes from Rio Tinto employees.

The "Rio Tinto spygate" has developed into a scandal that is enveloping the whole Chinese steel industry.

Iron Ore Negotiations

In 1996, China's steel output exceeded 100 million tons pushing them to the top of the world steel production tables. However, as demand for iron ore rose, the country discovered that the amount and quality of domestic iron ore deposits was unable to satisfy domestic demand and, starting from 2001, they began to import large quantities of iron ore from abroad.

China began participating in international iron ore price negotiations in 2003. However, even after  becoming the world's biggest buyer of iron ore, the country was unable to utilize it's market position as a majorglobal buyer to achieve price-setting rights.

Up until this year, annual iron ore negotiations between international mining companies and their Chinese customers had been handled directly by the larger steel mills that had been authorized to import iron ore directly. Although, even then, Chinese regulators were already beginning to suspect that something was wrong with the way negotiations were being handled.

Despite repeated declarations that they would do a better job in leading the negotiations on behalf of Chinese buyers, Baosteel received quite a lot of criticism from industry insiders.

It's now been revealed that the three huge mining companies, BHP Billiton, Rio Tinto and Vale - who together account for three-quarters of seaborne iron ore trade - were able to dominate the price negotiations because they had access to key information related to China's steel industry.

It seems this sensitive information was being leaked by China's large state-owned steel producers and often at a price.

A Unified Front

CISA had earlier reported to the Ministry of Commerce and other high-level authorities in China about the unwritten rules that appeared to shape the annual iron ore negotiations, and warned that if the structure of these negotiations weren't changed soon, the outcome could be disastrous.

However, no appropriate response was formulated and details of the sensitive negotiations continued to be leaked.

Although CISA had long expressed their dissatisfaction with the iron ore negotiations, it was only towards the end of last year's negotiations that they were given permission to act. After they received authorization from the Chinese government, they began to introduce strict measures aimed at regulating China's steel industry.

"CISA hoped to form a united front and to use the appeal of the aggregate demand represented by China's national steel mills as a bargaining chip" according to an analyst who used to work at Baosteel. He went on to compare CISAs attempts to unify the steel mills to the historical attempts of Su Qin, a renowned political strategist from the warring states period, to persuade six Chinese states to unite and defeat the Qin.

The CISA's goal in unifying the steel mills was simple, they wanted prices to be set according to the fundamental market laws of supply and demand. Currently, and for a long time now, this has been far from the case, with suppliers being able to dictate prices.

They were authorized to replace Baosteel as China's official representative at this year's price negotiations, and from the very start they adopted a tough negotiating position. Shan Shanghua, secretary general of CISA, made numerous public declarations that "the price of iron ore should be reduced by more than 40%, and return to 2007 levels."

But the appointment of CISA as the Chinese steel mill negotiator not only confused the overseas mining companies, but the fact that the association was adopting such a tough stance further elevated this confusion to something approaching frustration.

According to one analyst "in the eyes of the mining interests, CISA weren't qualified to represent the Chinese steel mills in price negotiations and the bureaucratic nature of their negotiating style left them dissatisfied."

But this tough approach on CISA's part did not lead to the desired results, with the three global mining giants continuing to reject CISAs "unreasonable request" as negotiations exceeded the June 30 deadline.

Despite CISAs belief that they could use their position to pressure suppliers to lower prices, they soon realised that the "bottom line" of their negotiating position had already ended up in the hands of the people sitting across the table.

This fact was quickly reported to Chinese officials.

According to an unamed Baosteel employee, "they had begun looking into this long ago, Chinese officials got to the stage where they could no longer endure the harm that was being done to China's national interest." 

According to the same source, the scandal that began with the Rio Tinto arrests on July 6 was "just the start, the state will continue to use heavy-handed techniques to sort out the problems with the way in which iron ore negotiations are currently handled."

The Unwritten Rules of Iron Ore Negotiations

According to an experienced analyst with who once worked for Baosteel, "Iron ore negotiations are a joke. No one takes them seriously,"

"What the big steel companies want is a big a quota as possible, nothing else. They don't care about the price." he continued.

Since the cost of iron ore will simply be added to the final product, there is no financial incentive for the large steel companies to get the lowest price possible.

However, they do have an interest in getting the largest quota possible as they will be able to make a huge profit by selling surplus iron ore at the higher spot-market prices to the smaller steel mills that don't have authorization to import iron ore.

To strengthen their "cooperation" with China's steel makers, the three global mining companies that dominate word iron ore trade are eager to hire employees with experienced in China's steel industry. These employees can help them to better understand the way China's steel industry works and also assist them in maintaining a good relationship with the relevant government departments, steel associations and companies.

It's been reported that these employees attempt to maintain a good relationship with Chinese steel mills by offering special gifts such as Olympic tickets or overseas trips to Chinese steel executives.

According to industry insiders, many private steel companies in China know all about the secret dealings that go on between larger Chinese steel mills and the global miners.


The as-yet-to-be-completed 2009 iron ore negotiations were supposed to mark a huge shift in the way that the price talks were conducted.

However, as the China Iron and Steel Association (CISA) stepped in to replace individual steel mills like Baosteel in the annual negotiations, the unwritten industry practices that had defined the negotiations since 2003, once again began to emerge.

The arrest of the Rio Tinto employees earlier this month appears to be the latest salvo in an ongoing battle between CISA and the major Chinese steel mills.

As one unnamed source at Baosteel described it, "the Rio Tinto affair is really a struggle between the market power of China's steel companies and the political power of China's government planners."

Links and Sources
ABC: Iron ore Image
DayLife: Shipping iron ore Image