Vale (RIO) cuts off iron ore… and China goes shopping
Today's Financial News - Posted September 25, 2008
Vale (RIO) has cancelled its iron ore shipments to China until the country’s steelmakers cough up more dough. But China has other ideas. And Vale may find its products aren’t as vital as it originally thought.
by Stephanie Grimmett
Baltimore — (TFN): It’s the “teach a man to fish” theory of steelmaking: Buy iron ore from someone else, and you have it for a day (actually, 365 days, since iron ore is sold in year-long contracts), but buy your own mine, and you have iron ore for life.
China’s steelmakers are worried about the price of their biggest ingredient.
China’s growth is tied to the construction of new offices, apartment buildings and Olympic-commemorative sports complexes. And all of those new high-rises and architecturally avant-garde fitness centers pushing their way into the Beijing and Shanghai skylines need a lot of steel (so much that the government limits the amount that can be exported, flooding the domestic market to keep steel prices artificially low). And steel needs a lot of iron ore.
China has three major iron ore suppliers: Australia’s BHP Billiton (NYSE:BHP) and Rio Tinto (NYSE:RTP) both raised their contract prices on China this year by as much as 97%. And right now, the country’s steelmakers are engaged in a staring contest with the third, Brazil’s Companhia Vale do Rio Doce (NYSE:RIO), waiting to see who’ll blink first.
Vale, which only got a 71% increase in this year’s contract price, wants more money and canceled its shipments to the country until China coughs up the dough. But the Chinese steelmakers, many of which are still on the government’s short leash, aren’t budging on their contract prices, even if they are 11% lower than Vale charges its European customers.
In the meantime, China is shopping around for its own iron ore mines to solve the supply problem altogether. Jiangsu Shagang Group, one of China’s largest state-controlled steel companies, just bought a 45% stake in Australia’s Grange Resources (Australia:GRR) (Anybody else notice that China is slowly buying all of Australia? Shouldn’t this alarm someone? Like the prime minister or whoever runs the country’s military?)
Shagang already controls Australian Bulk Minerals, which operates a Tasmania iron ore mine. And it plans to combine the two companies to create a billion-dollar (I’m not being hyperbolic, the new company will be worth about 1 billion Australian dollars) iron ore miner.
If China’s steelmakers continue on their current plans, Vale may find itself not as vital as it once thought. Perhaps 71% is a good enough raise for 2008. Afterall, with only three months left in this year’s contract, negotiations for next year could make up for all of the lost profits in this year’s contract.
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September 26th, 2008 at 7:15 am
I have seen a website where China can get it cheaper.
September 26th, 2008 at 8:15 am
“Make hay while the sun shines ” … some people think it wise ???
September 26th, 2008 at 10:00 am
Please Fact Check Jiangsu Shagang Group. You say its one of China's largest state-owned steel companies. Actually, it's the largest private steel company in China (from our files). If necessary, please issue a Correction. Thank you.
September 26th, 2008 at 10:21 am
“Significant Chinese government ownership is also present in Jiangsu Shagang Group, which is billed as the largest private steel enterprise in China and the countryâs fourth largest steel producer.7 The firm was formed in 1975 as a village enterprise,8 and changed its name to Jiangsu Shagang Group in 1995.
The firmâs ownership status changed in 2001, during a period of asset stripping management buyouts in the Chinese steel industry. Approximately 17 percent of the firm was purchased by the plant general manager and 25 percent of the firm was sold to the Jiangsu SASAC. An additional 23 percent went to the companyâs labor union, which is controlled by the Chinese Communist Party, 9 and almost 35 percent went to the âemployees of Shagang.â That same year, the firm doubled its capacity by acquiring a German mill and reassembling it in China.
In 2006, it acquired Huaigang, a specialty steel producer whose ownership has at various times included the municipal government of Huaiâan, the provincial government of Jiangsu, and the Nanjing Iron & Steel Group, which is owned by the Jiangsu Province SASAC.10 In short, even Chinaâs largest privately owned producer is substantially state-owned, and appears to have received capital inflows from the state in the same year it doubled its capacity.”
– “Government Ownership and Control of Chinaâs 'Private' Steel Producers”, Published by Wiley Rein, LLP, Law Firm, Washington, D.C.
I'm sorry. I should have said Jiangsu Shangang Group was government-controlled, not government-owned. They aren't the same thing, and I should have been more precise with my terminology.
September 26th, 2008 at 10:28 am
“Significant Chinese government ownership is also present in Jiangsu Shagang Group, which is billed as the largest private steel enterprise in China and the country’s fourth largest steel producer.7 The firm was formed in 1975 as a village enterprise,8 and changed its name to Jiangsu Shagang Group in 1995.
The firm’s ownership status changed in 2001, during a period of asset stripping management buyouts in the Chinese steel industry. Approximately 17 percent of the firm was purchased by the plant general manager and 25 percent of the firm was sold to the Jiangsu SASAC. An additional 23 percent went to the company’s labor union, which is controlled by the Chinese Communist Party, 9 and almost 35 percent went to the “employees of Shagang.” That same year, the firm doubled its capacity by acquiring a German mill and reassembling it in China.
In 2006, it acquired Huaigang, a specialty steel producer whose ownership has at various times included the municipal government of Huai’an, the provincial government of Jiangsu, and the Nanjing Iron & Steel Group, which is owned by the Jiangsu Province SASAC.10 In short, even China’s largest privately owned producer is substantially state-owned, and appears to have received capital inflows from the state in the same year it doubled its capacity.”
– “Government Ownership and Control of China’s 'Private' Steel Producers”, Published by Wiley Rein, LLP, Law Firm, Washington, D.C.
I'm sorry. I should have said Jiangsu Shangang Group was government-controlled, not government-owned. They aren't the same thing, and I should have been more precise with my terminology.
September 26th, 2008 at 10:34 am
I'm sorry. I should have said Jiangsu Shangang Group was government-controlled (see below), not government-owned. They aren't the same thing, and I should have been more precise with my terminology.
“Significant Chinese government ownership is also present in Jiangsu Shagang Group, which is billed as the largest private steel enterprise in China and the country’s fourth largest steel producer. The firm was formed in 1975 as a village enterprise, and changed its name to Jiangsu Shagang Group in 1995.
The firm’s ownership status changed in 2001, during a period of asset stripping management buyouts in the Chinese steel industry. Approximately 17 percent of the firm was purchased by the plant general manager and 25 percent of the firm was sold to the Jiangsu SASAC. An additional 23 percent went to the company’s labor union, which is controlled by the Chinese Communist Party, and almost 35 percent went to the “employees of Shagang.” That same year, the firm doubled its capacity by acquiring a German mill and reassembling it in China.
In 2006, it acquired Huaigang, a specialty steel producer whose ownership has at various times included the municipal government of Huai’an, the provincial government of Jiangsu, and the Nanjing Iron & Steel Group, which is owned by the Jiangsu Province SASAC.
In short, even China’s largest privately owned producer is substantially state-owned, and appears to have received capital inflows from the state in the same year it doubled its capacity.”
– “Government Ownership and Control of China’s 'Private' Steel Producers”, Published by Wiley Rein, LLP, Law Firm, Washington, D.C.