China's steelmakers and traders will seek a significant cut in iron ore prices during 2009-10 negotiations with mining companies, said Shan Shanghua, secretary-general of the China Iron and Steel Association,.

"There is no turning back," he said in the latest meeting of the association. "Prices must be cut drastically this year."

This is the first time in seven years Chinese steelmakers are pushing for a reduction in benchmark contract iron ore prices as the global recession crimps demand from carmakers and builders.

Talks to settle 2009 benchmark contract prices started late last year between Chinese steelmakers and the biggest three suppliers, BHP Billiton Ltd, Rio Tinto and Brazil's Cia Vale do Rio Doce.

The steel association and China's biggest steelmaker Baosteel, which leads the ongoing negotiations with mining companies, are reportedly asking for a 40 percent cut in 2009 iron ore contract prices.

China will demand a bigger cut in prices from BHP Billiton and Rio Tinto than from Vale.

BHP and Rio almost doubled prices for their ore from Australia last year, exceeding Vale's 71 percent increase because it was cheaper to ship the material to China from Brazil than Australia.

"There's no equalization if Australian and Brazilian ore gets the same price cut," Shan said in an earlier interview. "That's unacceptable."

The two sides failed to reach a consensus in the first two rounds of talks as suppliers expect a recovery in the Chinese steel industry before long.

Chinese mills rejected a 10 percent price cut which Vale offered late January.

"Nobody wants to take that offer," said Zou Jian, chairman of the Metallurgical Mines Association of China and a director of the China Iron & Steel Association (CISA).

"They're hoping steel prices will recover, but that doesn't look likely," Zou said, adding he expects the fall in prices this year to be "large".

China also rejected an index pricing system proposed by a supplier. BHP Billiton suggested replacing the current fixed-price contract with an index-based pricing, which adjusts prices on a more regular basis or based on spot market conditions.

China is the largest iron ore consumer in the world but does not have a big say in the international pricing system. Hundreds of steel mills and traders negotiated with suppliers separately for the prices each year before 2005.

The CISA increased the import volume threshold for domestic steelmakers and traders to qualify for iron ore import permits in recent years, effectively cutting the number of importers, in order to strengthen their negotiating position. Baosteel became the only representative of importers in negotiations.

But some leading mills were not pleased with the results Baosteel secured in previous years. The prices negotiated in the talks may be acceptable for Baosteel, an industry insider said, speaking on condition of anonymity, but may not be for smaller, less-profitable mills.

CISA members signed an industrial concord last month pledging self-discipline in iron ore import. They promised they will import in accordance with their production demands and will not negotiate separately with suppliers for this year's import prices.

The steel industry will build up an agent system to give smaller mills access to overseas raw materials, benefiting both mining companies and steel mills, said Shan.

Under the new scheme, steelmakers unqualified for iron ore imports will buy iron ore from traders.

(China Daily March 9, 2009)