China Steel Mills Say Suppliers Encourage Speculation

By Bloomberg News

July 31 (Bloomberg) -- China’s steelmakers, stalled in iron ore price talks with Rio Tinto Group and BHP Billiton Ltd., said suppliers are encouraging speculative trading in the spot market through cash auctions.

Iron-ore producers fed “speculative actions” by increasing sales on the spot market rather than through contracts, leading to huge stockpiles, the China Iron & Steel Association said in a statement issued in Beijing today. The group called on the government to limit resale profits made by traders and stop the sale of ore to obsolete mills.

“We object to speculative and manipulative actions,” Luo Bingsheng, vice chairman of the association, said a press conference.

China’s iron ore imports surged 29 percent in the first half, hurting the steel group’s attempt to negotiate a price cut bigger than the 33 percent offered by BHP, Rio and Vale SA. Police in Shanghai arrested four Rio executives on spying charges this month in a probe that Australia said is related to iron-ore price talks.

Talks between the steel association and iron ore producers to agree to contract prices are still ongoing, and China is seeking a “win-win” agreement, Luo said.

New Trading System

Under an import system proposed by the steel group, traders would buy ore at contract prices agreed to between steelmakers and iron ore producers, Luo said. These traders would take a 3 percent to 5 percent fee. The association would record the amount of ore purchased by mills and the price paid, he said.

Luo is making the comments as cash market prices in China surged above contract prices offered by Rio Tinto, BHP and Vale, the world’s three largest suppliers. Steel output in China jumped to a record in the first half as the government spends 4 trillion yuan ($586 billion) to revive economic growth.

“China’s steel capacity has almost exploded,” said Peter Arden, a mining analyst at Ord Minnett Ltd. in Melbourne. “The only way the smaller, mid-sized mills can get access (to iron ore) is in the spot market.”

Spot iron ore prices, which include freight charges, have jumped 31 percent this year to $94 a metric ton, according to the Steel Index. The benchmark Rio Tinto product from Australia is sold at $61 a ton to Japanese and Korean customers. It costs about $14.327 a ton to ship ore from Australia to China.

There are 152 importers of iron ore in China this year, exceeding the 112 licenses handed out, the steel group said. Iron ore sold in cash market accounted for 83 percent of imports this year, the steel association said.

--Xiao Yu, Jesse Riseborough. Editors: Tan Hwee Ann, Teo Chian Wei

To contact the Bloomberg News staff on this story: Xiao Yu in Beijing on yxiao@bloomberg.net;