Some Chinese steelmakers paid an average 77% more than their competitors for iron ore during the September quarter, as tough negotiations with producers left many paying spot prices, new analysis shows.

Large Japanese, South Korean and Taiwanese steelmakers accepted new benchmark prices for 2009 that were about 33% cheaper than 2008 rates, but Chinese companies held out for a better deal.

In an attempt to secure lower prices, many Chinese mills allowed the government-controlled China Iron and Steel Association (CISA) to negotiate on their behalf. CISA sought a price cut of 40 to 45%, but failed to secure any deal, leaving many mills in the Asian nation to pay spot prices, which rapidly became more expensive.

Iron ore analyst with Resource Capital Research, Trent Allen, said large Chinese steel mills had negotiated directly with iron ore miners and had deals comparable to competitors, but smaller firms ended up paying spot prices.

“The smaller steel mills which were forced to buy ore at spot were paying a 77% premium to the contract rate which was paid by their larger compatriots,” Mr Allen said.

He added the delivered contract ore cost, including freight, was about $66.75/t for Chinese customers in September, assuming it was 62% pure, while the average quarterly spot price in China was RMB811.85/t ($118.79).

The largest price differential was in early August, when Chinese spot prices got as high as RMB920/t ($134.76), more than twice the cost of benchmark ore, he said. There has been speculation Chinese steelmaker Baosteel will lead negotiations for the 2010 benchmark deal, expected to commence soon.

Source: Sydney Morning Herald, 8 October 2009