AirPower【Ｍｅｔａｌ　Ｐｏｗｅｒ】

　　Wugang (Wuhan Iron & Steel Group Corp.), one of China’s top 10 iron and steel enterprises, has begun to tap an iron ore belt with reserves of almost 2 billion tons in central China’s Hubei Province.
　　The belt was detected as early as 1959, but has lain idle due to its high phosphorus content. At the beginning of this year, however, Wugang, together with the Wuhan University of Science and Technology, succeeded in developing technology that makes large-scale exploitation possible this year.
　　“International iron ore prices are too high, so we are turning to domestic iron ore to reduce costs,” said Wang Ling, Deputy General Manager of Wugang.
　　Using domestic iron ore can reduce the cost of producing steel by about one third. But, since most domestic iron ore mines have low-grade deposits, enterprises usually choose foreign ore.
　　Wugang, with a current annual production capacity of 20 million tons, consumes about 128 million tons of iron ore every year. So the newly developed iron ore belt can satisfy the company’s demand for about 10 years. The company, without home-based large iron ore reserves previously, had to purchase most of its supply abroad. Thus, the development of the iron ore belt will help the company reduce its reliance on foreign resources.
　　Like Wugang, many Chinese iron and steel enterprises have turned to domestic sources due to skyrocketing international iron ore prices.
　　The Mengku iron ore mine, with deposits of 220 million tons, based in northwest China’s Xinjiang Uygur Autonomous Region, used to supply only about 100,000 tons of iron ore to a small local mill due to its remote location and poor development technology. But now the mine has an annual production capacity of 4 million tons.
　　“As demand for domestic iron ore expands, we’ve been trying hard to increase our exploitation capacity,” said Fu Qingzhao, an engineer at Bayi Iron & Steel Co.
　　
　　Domestic output jumps
　　
　　According to the National Bureau of Statistics, China plans to produce 540 million tons of iron ore this year, an increase of 120 million tons from 2005. In March alone, the output hit 45 million tons, a jump of 42.4 percent from the same month last year.
　　Zou Jian, Director of the Association of Metallurgical Mine Enterprises, said China has made major progress in developing its iron ore mines. This year, four iron ore projects, each with an annual output of 5 million tons, will be put into production, and another two are under construction.
　　The supply increase helps drive down domestic iron ore prices. The present purchase price incurred by major domestic steel mills is 30 yuan less per ton from that in March.
　　China actually does not lack iron ore resources, with 2,034 producing areas verified. Its iron ore reserves total 58.12 billion tons, ranking fourth in the world. However, the average grade of China’s iron ore stands at only 33 percent, 11 percentage points lower than the world level. Meanwhile, 97 percent of proved resources are low-grade deposits.
　　Figures show that among China’s proven ore-producing areas, there are 10 mines with deposits exceeding 1 billion tons, 99 mines with reserves between 100 million and 1 billion tons, 500 with supplies between 10 million and 100 million tons, and 837 with deposits of 1 million to 10 million tons.
　　Making matters worse, illegal exploitation of these ore mines is rampant. According to Shao Juenian, Director of the Department of Mineral Reserves under the Ministry of Land and Resources, most small mines are illegally developed by private companies or individuals, who have insufficient capital and technology to produce design, environmental protection and development plans and are prone to giving up low-grade deposits or mines that are difficult to develop. Thus, a large amount of resources is wasted.
　　This year, the ministry has strengthened its crackdown on illegal and destructive exploitation so as to protect iron ore resources.
　　Now, large iron and steel companies have started to get involved in developing these ore mines. Some buy exploitation rights, some join with exploitation enterprises, while others even purchase whole mines.
　　“You can survive if you own the ore resources,” said Wang Gang of the Planning Department of Taiyuan Steel Group, Shanxi Province.
　　Some 10 years ago, Taiyuan Steel Group bought an iron ore mountain, which has satisfied its production demand so far and enabled it to be immune to the price hikes in 2005. At present, the company is in talks to purchase another ore mountain. If successful, the acquisition will satisfy its demand for 25 years.
　　
　　Going global
　　
　　While investing in domestic ore mines, many Chinese iron and steel companies are also making inroads into overseas resources. Three enterprises, Sinosteel Corp., Tonghua Iron & Steel Group and Tianchi Yanbian Industries and Trading Corp. of Jilin Province, are in talks with relevant departments in North Korea to buy the development rights to a large iron ore mine there. The outcome might be known in a few months.
　　The mine, near the Chinese-North Korean border, is linked to China by a highway. The mine ranks first in Asia in terms of reserves, with 3 billion tons verified and 5 billion tons in prospect. So far, it has produced nearly 500 million tons, with some of the output already supplied to Chinese enterprises.
　　Meanwhile, Inner Mongolia-based Baotou Iron and Steel Co. has signed a framework agreement to develop an ore mine in Mongolia. Thus, Baotou Iron and Steel Co. has a raw material base abroad.
　　Though some enterprises have been involved in overseas resource development, the amount only accounts for 21 percent of China’s total imported mineral resources.
　　Luo Bingsheng, Secretary-General of China Iron and Steel Association, noted that more Chinese enterprises should go global, and the rate of iron ore exploited from overseas mines should grow to more than 50 percent of China’s total imports.
　　According to a report released by the State Development and Reform Commission in April, domestic demand for iron ore this year is expected to slacken. Both forecasts and actual production figures point to much lower demand growth this year than the increase of 121.76 million tons in 2005 and 75.85 million tons in 2004.
　　Jia Yinsong, Deputy Director of the Economic Performance Bureau under the commission, said China is promoting an adjustment of the industrial structure to reduce redundant production capacity. The targets for the steel sector this year include plans to shut down small mills with an annual production capacity lower than 200 cubic meters, and eliminate 43 million tons of pig iron production capacity, thus reducing the expected demand for iron ore by about 60 million tons.
　　Zou Jian, Director of the Association of Metallurgical Mine Enterprises, said iron and steel enterprises are affected by the appreciation of the renminbi, changes in raw material prices and state industrial policy. Against the background of China’s macro-economic adjustment and the sliding growth rate of fixed asset investment, such sectors as construction, shipping and containers could reduce their use of steel, which would reduce the demand for iron ore.
　　According to a report by the China Iron and Steel Association, China is expected to produce 384 million tons of crude steel and 360 million tons of pig iron this year. Therefore, the demand for iron ore is estimated to reach 558 million tons, an increase of less than 10 percent, or 48.8 million tons, over last year. Of the additional demand for iron ore, only 25.9 million tons will depend on imports. “Domestic enterprises won’t have to worry about the supply of iron ore,” the report said.
　　Association figures show that China imported 80.9 million tons of iron ore in the first quarter, an increase of 27.7 percent from the same period last year. So far, China has about 60 million tons of iron ore in stock.
　　“This is far above the normal storage of the steel industry,” said Luo Bingsheng, the association director.
　　Luo said many traders are stocking up on iron ore as they believe prices will jump. His association warned that enterprises should not import iron ore blindly.
　　
　　Pricing power
　　
　　Traditionally, Japanese and European steel makers establish a price with ore suppliers in annual negotiations, which becomes the benchmark price for buyers everywhere.
　　China, the world’s largest steel maker and iron ore importer, vowed to take the lead in the price negotiations after factories found themselves saddled with a 71.5 percent increase in iron ore prices negotiated between Nippon Steel of Japan and CVRD of Brazil, one of the world’s largest ore miners, last year.
　　The ongoing negotiations between Chinese steel makers and major iron ore miners should have been a chance for both sides to set this year’s price for their long-term supply contract out of mutual interest. But while European and Japanese steel makers began accepting the 19-percent increase for 2006 demanded by the suppliers, China’s buyers have refused to accept the increase.
　　After months of negotiations, China has been holding out for an increase of about 10 percent. China’s official negotiator for the industry, Baosteel Group, took a hard line, consistently rejecting demands for price increases of 20 percent or more.
　　The world’s three dominant iron ore miners--CVRD of Brazil, Rio Tinto Group of Australia and the Anglo-Australian company BHP Billiton--control 70 percent of the global supply.
　　In a statement posted on its website, the China Iron and Steel Association said negotiations would continue. “Asian benchmark iron ore prices haven’t been set,” the association said.
　　“Otherwise, Chinese steel companies will not accept the price,” it insisted. The 19-percent increase was above what Chinese buyers could afford, according to an unnamed insider. “Even if an increase is inevitable, China will strive to make a good deal,” he said.
　　Chinese steel makers’ refusal to accept a 19-percent increase in contracting prices for iron ore indicates the country’s desire for more pricing power in the international commodities market. In reports in the official Chinese media, senior steel industry officials urged suppliers to consider the prevailing market conditions in China in negotiating new prices.
　　As the biggest buyer, China should have considerable leverage in negotiations, but industry experts warn that rapid expansion and high debt levels have undermined the industry’s bargaining power.
　　For Chinese companies, not only steel makers, the ongoing ore price negotiations are a reminder that there is a limit to their dependence on cheap labor costs. If they want to maintain their competitiveness, they need to strive for greater pricing power both at the negotiating table as buyers of raw materials, and in the market as suppliers of high value-added products, said analysts.
　　

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