Shanxi's Defection Highlights CISA's Ineffectiveness

In what can only be seen as a blow to the China Iron and Steel Association's (CISA) efforts to secure steep discounts from iron ore producers in Australia and Brazil, steel mills in China's northern Shanxi Province have reportedly signed independent ore supply deals with international producers.  The move, expressly forbidden by the association, significantly undermines CISA's bargaining position in ongoing negotiations with the ore producers. 

For almost a year, CISA has demanded that iron ore producers roll back prices on long term supply contracts to their 2007 levels, a 40%-45% reduction over current rates.  The trade association, backed by the Chinese government, has insisted that China¡¯s position as the world¡¯s largest iron ore purchaser entitles it to discounts in excess of the 33% reduction granted to Asia's other steelmakers.  Australian mining giants BHP Billiton (BHP) and Rio Tinto (Rio), along with Brazil's Vale do Rio Doce (Vale), have steadfastly refused to go along with CISA's demands. 

The Shanxi steelmakers bettered the 33% discount obtained by Japanese and Korean mills, but failed to specify exactly what prices the Chinese producers obtained.

With less than two weeks to go before the end of long-term contract negotiations, China's steel producers have begun seeking individual deals with the Australian and Brazilian mines.  The Southern Metropolis Daily newspaper reported that Zhu Fengliang, secretary general of the Shanxi Iron and Steel Association, confirmed that a number of the provinces mills had negotiated separate agreements with overseas ore producers.

The Shanxi agreements are not the first such contracts signed by China's steelmakers.  Earlier in the year, 35 mills contracted with Vale for 50 million tons of imported ore.  CISA objected and said they would not recognize the validity of these agreements.  The association also threatened to revoke the import license of any mill that took actions that weakened CISA's negotiating position.

The defection of the Shanxi steelmakers adds a new dimension to the problems faced by the beleaguered trade association.  Until now, CISA has at least been able to count on the support of its 175 associates.  The actions of the Shanxi mills suggests that the association members themselves are losing faith in CISA's ability to deliver on its commitment to obtain the long term ore pricing they have promised. 

The current developments underscore CISA's lack of commercial acumen and their poor handling of the long-term contract negotiations.  From the outset, the CISA's negotiators failed to recognize that the major international ore producers would use China's growing demand for steel as leverage to keep prices high.  CISA was caught completely off guard when the major Australian producers bought up cargo space on shipping between China and Brazil, effectively driving up the price of Brazilian ore.  Throughout the process, the association has made threats (against its own members, as well as the ore producers) that it could not enforce. 

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