February 12, 2010

China cracks down on steel mills

SHANGHAI

China, the world’s biggest steel producer, says it will crack down on unauthorized steel mills as it postions itself to wield more control over prices during crucial iron ore talks.

Only about 300 million tons of the 567.8 million tons of crude steel produced last year in China was made with full government authorization, according to Miao Yu, a vice minister of the Ministry of Industry and Information Technology.

China plans step up efforts to shut down small mills or merge them with big steelmakers, cutting output to about 500 million tons by 2011, Miao said in remarks posted on the government-affiliated China Iron and Steel Association’s Web site.

One key goal of the restructuring is to increase Beijing’s influence over prices set for imported iron ore in ongoing negotiations with foreign suppliers, led by Shanghai-based Baosteel Group Corp.

Ore is the key material in steel making.

In the last round of talks, China sought but failed to present a unified front against the three biggest ore producers, Anglo-Australian miners Rio Tinto Ltd., BHP Billiton Ltd. and Brazil’s Vale SA. Instead, its bargaining position was undercut as smaller steel mills negotiated their own deals with miners, on the spot market.

The benchmark iron ore price paid by Asian steel mills is expected to rise by 40 per cent or more this year, buoyed by strong demand from massive stimulus spending on construction projects, and recoveries in other economies.

As the world’s biggest steel producer, accounting for half of all output, China wants to cut its own, more favourable deal rather than going along with prices negotiated by steelmakers in Japan and South Korea.

CISA’s vice chairman, Luo Bingsheng, has said China expects miners to seek a more favourable “unified price” involving a 20 to 30 per cent increase.

The Chinese steel association has won government support for its calls for tighter controls on iron ore imports. But he said he could not give the timing or details for such moves, according to reports in the Shanghai Securities News and other state-run newspapers.

By shutting smaller Chinese steel mills out of the market, CISA hopes to wield more influence over the big foreign miners, who account for 70 per cent of the world’s iron ore supply.

China’s five biggest steelmakers still account for just under a third of total output, well below the government’s target of 45 per cent, according to CISA.

“Chinese steelmakers may actually be forced to pay a premium to other mills as the miners most probably are feeling the financial burden of these annual slug-fests with China,” Steel Market Intelligence, a report by a private consultancy, said.

Associated Press

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