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Making good use of 'China factor'
Latest Updated by 2006-05-18 11:18:48

Misunderstanding of the China factor or China's demand by the world's biggest iron ore suppliers has led to the impasse of their talks with China on the iron ore prices for 2006.

Chinese official newspaper People's Daily on Tuesday carried an article by Mei Xinyu, a research fellow in the Ministry of Commerce. Mei gives the above perception on this issue. He urges suppliers to use, but not misuse, the China factor.

Negotiations over the iron ore prices have turned out a marathon in 2006. Agreement has normally been reached in the international market by April 1. The exception in the past 25 years took place in 2002 when Asia did not make the deal until May 31.

This year, Chinese iron and steel businesses are in the fifth round of talks with the three world iron ore suppliers: Australia's BHP Billiton Ltd. (BHP), Rio Tinto Group and Brazil's Companhia Vale do Rio Doce (RIO), or CVRD. Hopes of reaching agreement is still dim as China is struggling to resist the drastic price hike imposed by the top three.

The "China factor" has always been highlighted on the international bull market of primary products over the past two years. Prices have soared up greatly when major international investment institutions asserted massive demands of a primary product by China. A strange phenomenon appears: anything that China buys is expensive while anything that China sells is cheap.

As far as the iron ore market is concerned, world giants have kept talking about China's up-surging iron and steel output and iron ore imports. However, they turned a blind eye on the bubble behind the soaring output and imports.

China's iron and steel industry, like that in many other economies, is developing fast with the scattering structure, which in turn sparkles irrational, speculative motivations of businesses.

Bubbles on the iron ore market is obvious. In the first quarter of this year, such speculative mentality pushed up imports of iron ore sharply but did not reflect the real climate of China's iron and steel industry. By the end of April, China had had 60 million tons of iron ore inventories.

The wrong conclusion about China does not support the business sustainability of iron ore suppliers. As the biggest importer and consumer of the products in the world, China represents the opportunity based on lasting mutual benefits. The pursuit of maximizing the short term interests will most likely bring about lasting anguish of drastic readjustment.

Long term supply deals under stiff prices are unacceptable for small and medium sized Chinese iron and steel producers. Given that, suppliers can hardly expand their capacity to seek for further and long-term business boom.

Besides, restructuring is the way that China's iron and steel industry has to go down. It may experience either soft landing or hard landing. But the fierce market competition and overpriced iron ore may lead to hard landing, which in turn tumbles the market where the suppliers are.

The Chinese central bank has raised loan interest rates at the end of April, signaling the determination of curbing red hot fixed asset investment. Cooling fixed asset investment will help prickle the bubble in the spending spree on iron and steel industry and the iron ore demand.

That measure, completed by the planning of the whole iron and steel industry, will reduce the demand for bulk primary products and thus bolsters the sustainable and healthy development of the market.

In light of that, iron ore suppliers should give up the shortsightedness and offer reasonable prices so that a win-win result will be achieved for both iron and steel producers and iron ore importers.

On the international market of primary products, other suppliers should also use wisely rather than abuse the China factor or China's demand.

Editor: Yan

By: Source:People's Daily website
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