Chinese steel mills and global iron ore miners will likely reach an agreement

ATT

BEIJING -(Dow Jones)- Chinese steel mills and global iron ore miners will likely reach an agreement by April 1 on benchmark prices for 2010, Anshan Iron & Steel Group Corp. president Zhang Xiaogang said Wednesday.

Zhang's remarks come as global miners move more supply into the spot market and less for contracted iron ore and amid a steep rise in spot prices, which underscore the urgent need for Chinese mills to complete the price talks.

Zhang, who is the former head of the China Iron and Steel Association, said he isn't involved in talks this year.

Annual contract price negotiations collapsed last year after mining majors refused China's demand for a greater discount, and this year's talks have been contentious too, with Chinese steel officials saying one thing and miners quite another. Earlier this week, Hebei Iron & Steel Group president Wang Yifang said both sides had agreed to a Jan. 1 start date for annual contracts, only to be refuted days later by a Rio Tinto Ltd. (RTP) spokesman who said no agreement had been reached with anyone on the issue.

Zhang said Anshan's imports of iron ore from the spot market have been rising--China's fourth-largest steelmaker by output now imports 50%-60% of its needs and all of it from Rio Tinto, BHP Billiton (BHP) and Brazil's Vale (VALE). Spot prices of iron ore have been surging this year as world economies, especially China, recover from the global financial crisis. Against this backdrop, more supply in the spot market means steel mills are forced to buy the raw material at higher prices.

"Every mill is encountering this situation," Zhang told reporters during the National People's Congress.

He noted that even a large rise in benchmark prices won't be able to match spot prices, since spot prices have doubled this year so far compared with last year's benchmark prices. Zhang had already said last week the rise in benchmark prices this year will definitely exceed 20%, a level that Chinese steelmakers had been hoping for.

"(But) you shouldn't have one side facing losses, and the other having huge profits.

Overseas Expansion Plans, Consolidation On Track

Meanwhile, Zhang said his company will continue to look for opportunities to expand overseas. It hopes to acquire one or two steel processing lines in Europe this year after having invested in steel processing lines in Spain and Italy last year. He indicated Anshan's overseas expansion was focused on adding to its steel operations rather than securing raw materials. Chinese steelmakers are struggling with narrowing profit margins as raw material prices rise, a trend that has prompted some firms to invest directly in the iron ore sector overseas. Zhang pointed out that steelmakers may not have core knowledge about mining iron ore, even though it is an important ingredient for making steel. At home, Anshan expects to complete merging its operations with Benxi Iron & Steel (Group) Co. within this year.

"By the time we meet next year (during the NPC session), we are unlikely to discuss it again."

With the government's encouragement, Anshan Iron and Benxi Iron, both based in Liaoning province, were nominally merged in 2005 in order to hasten the consolidation of the country's fragmented steel industry, which has been a government goal for years. However, progress has been slow in the integration of the two firms.
Zhang said his firm still expects to complete a consolidation with two other domestic steel firms --Sichuan province-based Panzhihua Iron and Steel Group and Dongbei Special Steel Group Co. in the northeast.

-Yajun Zhang contributed to this article; Dow Jones Newswires; (86 10) 8400-7712; yajun.zhang@dowjones.com

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