would appear the Chinese are being taught a hard lesson not so much in
global capitalism, but in basic economics. The rapid expansion of the
Chinese steel sector has turned the country into a steel exporter and
into the world’s largest consumer of key ingredients for the production
of steel, such as iron ore.

No doubt, the Chinese thought they
could use their market weight to negotiate things in a direction that
would suit their perceived leading market position, but things seem to
be turning out differently.

Rio Tinto’s (RIO) latest contract
with South Korea’s POSCO is the first contract renewal for premium iron
ore lumps. Despite doubt creeping into some market analysts’
expectations about whether Rio Tinto and BHP Billiton (BHP) could
achieve a similar price increase as done for the cheaper iron ore
fines, the latest supply agreement has proven these doubts to be

But the Chinese are still holding off, their latest
strategy being a push to diversify pricing across different regions,
which would allow Chinese prices to be lower than in the rest of the

It seems unlikely that negotiators for Rio, BHP and
Brazil’s Companhia Vale do Rio Doce (CVRD) will allow for the creation
of such a precedent. This leaves the Chinese steel sector with two
options: either satisfy its needs via the open spot market (dangerous
strategy) or succumb to the 19% price rise proposal that is on the

Market commentators at Credit Suisse suggest this morning
that if anyone should be unhappy it should be global steel
manufacturers instead of the Chinese. “Perhaps if the Chinese ceased
producing more and more steel each year and therefore did not account
for almost the entire growth in global steel production, the market for
iron ore wouldn’t be quite so tight”, Credit Suisse points out. And to
be honest, it is difficult to argue otherwise.

It only seems logical that if China continues expanding its steel production, next
year’s contracts for iron ore deliveries might again go further up in

Maybe somebody should tell the Chinese.

From financial news service FNArena.