BEIJING, April 12 (Xinhua) -- Although China repeatedly voiced support for the iron ore benchmark system, analysts believed that a more flexible pricing system seemed unavoidable.
The world's three iron ore giants -- Vale of Brazil, Rio Tinto and BHP Billiton, which accounted for 68.5 percent of the global iron ore shipments in total -- have all announced their initiatives to shorten the long-term agreements in international iron ore prices, indicating the end of the decades-old annual benchmark pricing system.
Although details for the new system was not clear yet, analysts said quarterly-based, indexed or spot pricing would all be possible.
The development trend was a shorter-term-based pricing system, and it seemed China could not avert it, said Zhang Lin, an analyst with the Beijing-based Lange Steel Information Research Center.
What does this mean for China's steel industry?
Analysts said the change would lead to a price hike in iron ore market, maximize short-run profits of iron ore suppliers and largely squeeze profit margin at China's steel mills, exacerbating the already meager profit.
"If China follows the new pricing model, it means we have to accept a nearly doubled iron ore price," said Wu Jun, marketing manager with Jiangyin Xingcheng Special Steel Corp. "We can only pass on part of the price increase to consumers."
"We are still waiting for the result of iron ore price negotiation," he said. Iron ore under benchmark pricing accounts for 20 percent of the company's total imports.
The China Iron and Steel Association, which heads the price negotiation on behalf of domestic steel companies, said the negotiation was still underway. No information about the progress was available.
Hu Kai, an analyst with Umetal, an online steel information provider, said some private steel companies that seldom had access to benchmark pricing might welcome the new system, which would put them at an equal footing with major domestic rivals.
China has around 800 steel mills nationwide, but only 112 steel mills and ore traders have iron ore import licenses, enabling them to buy iron ore under the pricing negotiation mechanism.
As the world's largest iron ore importer, China imported a record of 630 million tonnes of iron ore in 2009, or 68 percent of the world's total shipments. Imports from Australia and Brazil mines accounted for 64.4 percent of the total, according to customs statistics.
Rising iron ore price would not only hurt the steel industry, but also affect the whole industrial sector, said Shi Chenyu, senior researcher at the investment department of Industrial and Commercial Bank of China.
"A more serious consequence is the new pricing system is likely to fuel speculative trading of iron ore, which would make more price volatility inevitable," said Zhang.
However, Zhang said the change would help avoid similar experience in 2008 when Chinese steel industry suffered overall losses after iron ore spot prices fell sharply because of the global financial crisis.
Since China joined the iron ore price negotiation in 2003, prices have been rising as suppliers bet on the growth in China's huge demand. In 2000, China accounted for just 16 percent of the sea-borne iron ore market, which surged to 68 percent last year.
Spot prices now climb to 166.67 U.S. dollar per tonne, nearly tripled from the same period last year.
Zhang said the Chinese government should further push forward the development of domestic iron ore mines and encourage steel enterprises to increase input in research and development to improve iron ore utilization efficiency.