China to Launch Iron Ore Price Index

September 26, 2011 Posted by China Briefing Reading Time: 2 minutes

Sept. 26 – China, the world’s largest iron ore consumer, will launch a new iron ore price index of its own in October, in a bid to provide iron ore traders with more market information and have a greater say in global pricing.

The iron ore index, compiled by the China Iron and Steel Association (CISA), the China Chamber of Commerce of Metals, Minerals and Chemical Importers and Exporters, as well as the Metallurgical Mines’ Association of China, will be released on a weekly basis starting in October.

The index will be comprised of two sub-indices: the domestically produced iron ore price index and the iron ore import price index. Both will be taking iron ore prices in April 1994 as the base; the domestic price index is based on the prices of iron ore concentrates in 14 Chinese provinces, autonomous regions and municipalities, while the import price index is collected based on statistics from eight ports.

A recent Reuters report, which cited the words of an employee at a foreign-invested trading company, said the composition of the domestic price index is especially welcomed because it will provide both importers and exporters with useful information on the trend in China’s domestic demand for iron ore.

As a rapidly developing country whose steel consumption accounted for 44.3 percent of the world’s total last year, China’s demand for iron ore is surging. The country imported 618 million tons of iron ore last year, absorbing two-thirds of the global iron ore production. China’s dependence on iron ore imports is also growing, standing as high as 62.5 percent.

However, along with the surge in international iron ore prices, Chinese steel manufacturers are seeing shrinking profit margins. Between January and July this year, the profit margin of China’s large and medium steel companies stood at a mere 3.08 percent, significantly lower than the 6.11 percent average profit margin for all the large scale industrial enterprises nationwide.

Unfortunately, the world’s biggest buyer still does not have much of a say in iron ore pricing during negotiations with global exporters. Following announcements by three international mining giants (Rio Tinto, Vale and BHP Billiton) on the end of the long-term iron ore contract pricing mechanism last year, the three companies have led the global iron ore market to price based on several international indices, including the Platts Iron Ore Index, the Steel Index, and the Metal Bulletin Iron Ore Index.

China’s launch of its iron ore price index revealed the country’s efforts to promote domestic importers’ international bargaining power, but experts say it takes time for the China-made index to be widely recognized in the international market.

International indices such as Platts have already built up a well-known brand image and it is hard to challenge them in the short term.

Zhang Changfu, vice president of the CISA, said he does not expect the new index will greatly impact prices immediately, but hopes it can objectively reflect the market fluctuations.

The Chinese steel makers struggling to protect their meager profit are seeking other avenues to reduce their reliance on iron ore imports. The domestic steel giants – under the encouragement of the Chinese government – are accelerating their investment into overseas mining projects. It is estimated the total iron ore production of all China’s overseas mining projects will reach 250 million tons in the medium and long term.