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Iron ore price rise could force China steel rationalization
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China imports almost half of the world's seaborne iron ore, making it the largest iron ore consumer in the world, but it has become a price-taker for this basic input for steel -- perhaps because it waited too long to negotiate with major suppliers.

Analysts said that this situation could have been anticipated, because iron ore was in such demand globally, but they added that higher costs might actually help rationalize the Chinese steel industry by pricing some smaller firms with obsolete technology out of business.

After Brazilian mining conglomerate Vale hammered out 2008 benchmark prices for iron ore fines with Japanese and Republic of Korea (ROK) steel makers last week, Baosteel Group, China's largest steel maker, agreed on the price for fiscal 2008, accepting the Brazilian miner's price hikes that ranged from 65 percent to 71 percent compared with 2007.

That's how benchmark pricing generally works for the international iron ore market: one group of buyers accepts a new range of prices, which then become the norm for the global industry.

Last year, it was Baosteel that set the benchmark with Vale. This year, other East Asian steel makers were eager to make a deal quickly, at least partly because some iron ore sellers started talking about 'more flexible' terms, meaning quarterly or even monthly re-pricing.

Soaring spot prices complicate bargaining

China's steel needs have soared, driven by rapid urbanization and many large infrastructure projects. China imports almost half of the world's seaborne iron ore, making it the largest iron ore consumer in the world. According to the China Iron and Steel Association (CISA), world iron ore seaborne trade in 2007 amounted to 805 million tons, of which 383 million were shipped to China, up 17.4 percent year-on-year.

Since China joined the international pricing negotiations in 2004, the price has risen every year. Price negotiations for 2004 ended with an 18.62 percent increase, followed by a 71.5 percent rise in 2005 and a 19 percent increase in 2006.

In 2006, China was the world's first major steel producer to settle with three mining firms -- Vale, Rio Tinto and BHP Billiton -- agreeing to a relatively modest hike of 9.5 percent for the year starting April 2007. That was the smallest price rise in the years since China joined the world price negotiations.

This time around, however, Chinese steel makers lost the opportunity to set the benchmark. Japanese steel makers reportedly rushed to wrap up the talks before the Chinese, according to media reports.

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