China vows to fight unauthorized steel mills

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Published: February 10,2010

Tags: China, international trade, steel

SHANGHAI — China, the world’s biggest steel producer, says it will crack down on unauthorized steel mills as it maneuvers to wield more control over prices during crucial iron ore talks.

Only about 300 million tons of the 567.8 million tons of crude steel produced last year in China was made with full government authorization, according to Miao Yu, a vice minister of the Ministry of Industry and Information Technology.

China plans step up efforts to shut down small mills or merge them with big steelmakers, cutting output to about 500 million tons by 2011, Miao said in remarks posted on the government-affiliated China Iron and Steel Association’s web site.

One key goal of the restructuring is to increase Beijing’s influence over prices set for imported iron ore in ongoing negotiations with foreign suppliers, led by Shanghai-based Baosteel Group Corp. Ore is they key material in steel making.

In the last round of talks, China sought but failed to present a unified front against the three biggest ore producers — Anglo-Australian miners Rio Tinto Ltd. and BHP Billiton Ltd. and Brazil’s Vale SA. Instead, its bargaining position was undercut as smaller steel mills negotiated their own deals with miners, buying heavily on the spot market.

The arrest last summer of four Rio Tinto employees in Shanghai, including Australian citizen Stern Hu, highlighted the difficulties of dealing with the state-dominated industry, and some analysts believe Beijing’s tactics could backfire.

Hu and three Chinese citizens are awaiting trial for alleged industrial espionage and bribery — charges linked to last year’s price negotiations. A Shanghai court has accepted the case, the official Xinhua News Agency reported Wednesday.

“Chinese steelmakers may actually be forced to pay a premium to other mills as the miners most probably are feeling the financial burden of these annual slug-fests with China,” said Steel Market Intelligence, a report by a private consultancy.

The benchmark iron ore price paid by Asian steel mills is expected to rise by 40 percent or more this year, buoyed by strong demand from massive stimulus spending on construction projects, and recoveries in other economies.

As the world’s biggest steel producer, accounting for half of all output, China wants to cut its own, more favorable deal rather than going along with prices negotiated by steelmakers in Japan and South Korea.

CISA’s vice chairman, Luo Bingsheng, has said China expects miners to seek a more favorable “unified price” involving a 20 percent to 30 percent increase.

Speaking to reporters in Beijing on Tuesday, Luo said the Chinese steel association has won government support for its calls for tighter controls on iron ore imports. But he said he could not give the timing or details for such moves, according to reports in the Shanghai Securities News and other state-run newspapers.

By shutting smaller Chinese steel mills out of the market, CISA hopes to wield more influence over the big foreign miners, who account for 70 percent of the world’s iron ore supply.

China’s five biggest steelmakers still account for just under a third of total output, well below the government’s target of 45 percent, according to CISA.

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