Shanghai. July 9. INTERFAX-CHINA - The China Iron and Steel Association has urged domestic steel mills to jointly sign long-term iron ore transportation contracts with large shipping companies, in order to combat high-level fluctuating freight costs, a senior CISA official told Interfax today.
Six major domestic steel mills and several large shipping companies attended a meeting held by the CISA in Beijing last Friday and discussed countermeasures to the recent high freight costs.
The six steel mills, representing steel mills in five Chinese regions, included Shougang representing Hebei Province, Anben Steel and Baotou Steel representing northeastern China, Jinan Steel representing the provinces of Shandong and Shanxi, Baosteel representing eastern China and WISCO representing central and southern China. Shipping companies in attendance included COSCO, China Shipping and Sinotrans, according to Chen Xianwen, deputy director general of the CISA.
"Domestic steel mills and shipping companies exchanged opinions on the recent increase in iron ore freight costs, and it was concluded that China's strong iron ore demand coupled with tight shipping capacity was the cause of high freight costs. Moreover, market speculation has also boosted freight costs to recent record highs," Chen explained.
China's iron ore demand will be significantly higher this year than last year. Moreover, tightness in shipping capacity will not be solved in the short term, the effect of which will be continued high freight costs for the rest of the year, Chen predicted.
Both Australian and Brazilian iron ore freight costs to Chinese ports have undergone severe fluctuations since the all-time-high in mid-May this year.
Iron ore freight cost from Brazil's Tubarao Port to Beilun/Baoshan ports fell almost 28 percent in the month since the May 16 peak, but subsequently rebounded 24 percent to approximately $50.59 per ton by last Friday. Iron ore freight costs from Western Australia to Beilun/Baoshan ports fell plunged percent in the month since May 16, but also recovered 26 percent to recent $18.96 per ton levels, according to statistics provided by Mysteel, a Shanghai-based steel consultancy.
A ship broker in Shanghai, who wished to remain anonymous, commented that the increasing number of forward freight agreements (FFAs) involving iron ore shipments to China will result in greater unpredictability in future iron ore freight costs.
FFAs provide a futures trading system for shipowners and operators, and charterers and traders, as a substitute for physical transactions. The agreements cover shipping routes, settlement times, quantity and contracted price, and are settled on a daily basis through a clearinghouse, where traders pay or receive the difference between the futures contract price and the market index price.
"Hot money injected by investment banks in the FFA market is also behind rapidly increasing cash freight costs," the broker added.
Under such circumstances, Chinese steel mills, led by major domestic steel mills, should jointly sign long-term contracts with domestic shipping companies, so as to secure more stable and lower freight costs, urged Chen from the CISA.
However, Chen later admitted that China's seaborne shipping market is far from fully mature, and large domestic shipping companies will only be able to gain a small share of the global market.
In the meantime, imported iron ore spot-prices are soaring rapidly on the back of the high freight costs. For example, the average CIF price of Indian grade 63.5 percent iron ore concentrate between July 2 and July 6 was $103 to $104 per ton, up $3 from the same period last month, based on statistics released by the China Chamber of Commerce of Metals, Minerals, and Chemicals Importers and Exporters (CCCMC).
Wang Zhe, an analyst with Minsheng Securities in Beijing, commented that domestic iron ore sales have surged recently as a result of higher imported iron ore prices. "Small and medium-sized steelworks in northern China are now reluctant to purchase imported iron ore in the international spot-market due to high prices, and are instead turning to lower priced domestic iron ore," he said.
The recent downturn in steel product prices has resulted in small-sized steel mills barely being able to afford any further iron ore price increases, he added.
He also expressed the opinion that imported iron ore prices would stay at current high levels for the remaining months of the year, on the back of strong demand from steel mills and current low steel product prices, which are only expected to recover firmly after the summer.
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