As China’s voracious demand for iron ore rises, the country demands a more stable, long term pricing policy from India. India which currently meets 16 percent of China’s iron ore demands sells iron ore on a spot basis, allowing the price to fluctuate as demand grows. India is China’s third largest supplier, after Australia and Brazil, who supply over 60 percent of their iron ore to China at contract prices, which allowed shipping costs to remain ‘relatively stable.’
‘Last year India’s spot sales to China led to additional costs of US$838.3 million for Chinese steel makers,’ Luo Bingsheng, executive vice chairman of the China Iron and Steel Association told Forbes.
Now, China plans to take serious action to make sure iron ore prices are more stablized. China will have to consider reducing purchases of iron ore from India if Indian suppliers do not moderate their ‘over-reliance’ on spot sales, he added.
India’s spot sales have negative effects on both sides, and seriously affect the competitiveness of Indian iron ore. Therefore, although China imports more from India each year, its market share in China’s iron ore market has fallen.
India had a 25 percent share in 2005, but saw its share in China fall to under 16 percent last year.
However, India , who exports 80 percent of its iron ore to China is unwilling to set a fixed price to their iron ore exports. “India can do little in determining prices for iron ore shipped to China because it does not have a major share (16 percent) of the market, an Indian commerce ministry official told Forbes.
The move is also part of India’s drive to move away from the current pattern of trade with China. ‘India mainly sells primary commodities to China, and imports value-added goods back. This situation has to change. We also need to enhance mutual technological exchanges, because we have not always been successful in getting technology transfers from developed countries.
The value of Sino-Indian trade rose 56 percent to US$38.7 billion last year, according to Chinese data.
India is only a marginal supplier to the vast Chinese market accounting for around 20% of the volume. It has little say in determining the prices. In fact, if India did not supply around 100 million mt of iron ore, the other major suppliers would have jacked up their annual contract prices beyond 65% agreed for 2008.
Indian suppliers are also keen for a long term contract. The challenge, however, is what should be the price basis for long term contract.
Unlike in case of Brazil and Australia suppliers following benchmark prices for the past several years, there is no such benchmark price for Indian iron ore. In the absence of this benchmark, price setting for long term is a challenging task.
Given the unique conditions in India like small size mines, poor connectivity to ports, poor infrastructure like rail/road/port capacities coupled with high cost logistics, there is a need for a unique benchmark price for Indian iron ore.
Recently there have been some efforts at arriving at the benchmark price. A framework for such a model has been presented in the iron ore conference held in Beijing, China on 29th April,2008. China now should seriously study the suggested framework and initiate dialogue with Indian suppliers for concluding long term supply contract.
Without such a dialogue, no real break-through can be achieved between Chinese buyers and Indian suppliers on long term contract basis.