Big steelmakers in China yesterday shrugged off
the impact of Monday's record rise in iron ore
prices, but the higher prices could increase cost
pressures on smaller mills and hasten consolidation
in the industry.
"The
mills' reaction has been relatively calm,"
Tina Wang, a Shanghai-based steel market analyst
at Steel Business Briefing, a consultancy, said.
"They were prepared for this."
The
average 85 per cent price increase agreed with
Rio Tinto, the Anglo-Australian miner, was within
the range of expectations, analysts said. Chinese
mills had been expecting a price rise of at
least 65 per cent, in line with that agreed
with Brazilian miner Vale this year.
Baosteel
stressed yesterday that the deal "reflects
the sincerity from both sides to maintain the
traditional pricing mechanisms".
"This
was not the worst-case scenario" for the
steelmakers, Helen Lau, a Shanghai analyst with
Daiwa Securities, said. Ms Lau noted that the
new price reflected only a small portion of
the freight rate differential be-tween shipping
Australian and Brazilian ore to China. Australian
miners have argued that they should reap more
benefit from the fact that it is cheaper for
Chinese steelmakers to buy ore shipped from
Australia.
"They
[large and medium-sized steelmakers] can still
maintain a long-term pricing system with the
Australian miners," and avoid higher-priced
spot market purchases, Ms Wang said.
But
analysts said thousands of smaller Chinese mills
could be affected if the pricing agreement leads
to higher spot prices, hastening consolidation
in the steel industry. Smaller mills buy iron
ore on the spot market and are unable to lock
in prices by annual contract.
"The
Chinese government wants to consolidate the
industry so that everyone can buy on contract
basis and enhance their bargaining power,"
Ms Lau said.
She
said the effect on Baosteel would be limited,
increasing unit production cost by only $17,
which could easily be covered by a 3 per cent
Baosteel price rise.
Shares
in Baoshan Iron & Steel, Baosteel's listed
subsidiary, fell 7.8 per cent in Shanghai, but
analysts said this reflected general market
weakness and the risk of higher coking coal
prices.
Baosteel
announced a further step in the consolidation
process when it said it would take an 80 per
cent stake in a Rmb35.9bn ($5.2bn) steel joint
venture in Guangdong province, part of the Chinese
government's industry restructuring.