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While China is right to continue supporting the annual iron ore benchmark mechanism, it needs to allow smaller industry players to participate, the head of the country's iron ore importers association said.
Xu Xu, chairman of the China Chamber of Commerce of Metals, Minerals and Chemicals Importers and Exporters (CCCMC), which participates in pricing negotiations with foreign miners alongside the China Iron and Steel Association (CISA), said on Thursday that only the benchmark system could guarantee stability and security for both buyers and sellers.
"The long-term contract price system has played an important role in guaranteeing stability for both sides. Recently, Vale and BHP Billiton have proposed a new quarterly index-based pricing system, putting the long-term price mechanism under threat and hurting the long-term healthy development of the two miners and the Chinese steel industry," he told a conference. "For that reason, we are calling for the benchmark pricing system to be retained and to be stably implemented."
Restricting much of the import business to large state-owned mills and traders had created distortions in the market, and the "scope of the mechanism must be extended", he said.
"By allowing only big state-owned steel mills to participate in the talks, the interests of small and medium-sized mills, or the traders, are not represented," he said.
With only a handful of licensed mills and traders allowed to import iron ore on a benchmark basis, smaller mills usually resort to more expensive supplies – often benchmark deliveries resold at a profit by the big steel enterprises.
Chinese officials and steel mill executives have continued to express support for the old benchmark system even as the three big miners – Vale, BHP Billiton and Rio Tinto move to a more flexible quarterly pricing mechanism. Price talks, led by China's Baosteel, are continuing.
The chamber met with CISA last week to discuss ways of cleaning up the country's chaotic iron ore import sector, which CISA has blamed for undermining its position during benchmark price negotiations with foreign miners last year by importing far more than they needed on the expectation that prices would rise.
The two sides agreed to revoke the licenses of those traders who imported less than 1 million tonnes of ore over the course of 2009, and also said it would impose stricter controls on importing "agents" who act on behalf of China's steel mills to procure ore supplies from the foreign miners but often resell at huge volumes on the spot market.
However, Xu said the contribution made by traders still needed to be recognised, and that they played an important role in guaranteeing supplies to China's rapidly expanding steel sector last year after a large number of mills reneged on benchmark contracts following a collapse in spot prices.
He also said it was unfair to accuse them of hoarding iron ore, noting that only around 20 percent of the 65 million tonnes of inventory now at China's ports was owned by trading companies.
Xu would not discuss statements made at last week's meeting by Shan Shanghua, CISA's secretary general, calling on mills and traders to boycott the three big miners for two months in order to strengthen China's position in the price talks, but many in the industry said the proposal was highly counterproductive and unlikely to be heeded.
"It is possible, in theory, that the government could encourage the big state-owned mills to stop importing from the three big miners – they can run down their stockpiles for a couple of months and buy from elsewhere," said Li Bing, deputy general manager with Wanxiang Resources, a private Shanghai-based steel producer and trader. "But this will hurt them, and I don't see it happening. This was a CISA request and they are quite low ."
Another trader, based in the eastern province of Jiangsu, said while the big mills, and the government, continued to express support for the benchmark mechanism, their smaller counterparts would be glad to see it end.
"Obviously there are concerns about how much prices will rise, but changes to the system are acceptable for small steel companies because it will allow them to compete on a more equal basis with the big companies, which have been getting much cheaper iron ore supplies for years," he said.