China gripes about Indian iron ore but trade to continue

Chinese mills equipped to process low-grades

Chinese traders also to blame

China8217;s steel output,already more than half the world8217;s,continues to power ahead despite worries about monetary tightening,hitting a record daily high of 1.95 million tonnes in the first 10 days of May.

And China has a history of failing to impose its will on the country8217;s fractured and fractious steel sector,after failing to keep steel mills from signing quarterly rather than annual contracts with the top iron ore miners.

I don8217;t think there is anything the Chinese can do about it,said Graeme Train,analyst with Macquarie Securities in Shanghai.

The Chinese are fully dependent on the Indians to get their ore and the Indians are fully dependent on the Chinese to sell their ore,so China will keep buying,unless they want their economy to grind to a halt.

The General Administration for Quality,Supervision,Inspection and Quarantine,China8217;s quality watchdog,said on Thursday that as much as 36 percent of the ore shipments delivered to Jiangsu province on the eastern coast in the first four months of the year did not meet required levels for iron content or had impurities.

It said in a notice posted on its website that the affected cargoes of ore and ore products had a monetary value of 2.2 billion,although Chinese customs figures show Jiangsu province received 19.8 million tonnes of iron ore in the first quarter,with a total monetary value of 3.2 billion.

INDIAN WORRIES

The worries about Indian iron ore quality are not new.

Basant Poddar,vice-president of the Federation of Indian Mineral Industries,said quality issues had come to light in the past for supplies from India8217;s western coast for mid-stream loading.

Such instances happened in the past for a small quantity but not of this magnitude,he said.

There will be lot of legal issues to be resolved in the near future including issues related to Line of Credits LCs, told Reuters.

Last April,the China Chamber of Commerce of Metals,Minerals and Chemicals Importers and Exporters CCCMC sought to improve the quality of ore coming into China by banning grades of 60 percent or less. The move was part of a wider plan to impose discipline on the chaotic iron ore market and better regulate hundreds of independent traders.

But with China desperate for supplies,few paid any heed to the directive,and it was not backed up by any ruling from the central government.

China has traditionally struggled to regulate in steel and iron ore markets because of the sheer weight of demand 8212; and that is expected to remain the case even after the AQSIQ warning.

This isn8217;t the first time that AQSIQ have complained 8212; I8217;ve seen notices from them about this subject before,said an iron ore trader based in Shanghai.

Whenever demand is on the up,this problem arises because people stop considering quality and look for quantity,he said.

Chinese steel industry officials said the issue of substandard iron ore from India was long-standing,and in most cases they find a way around it.

It8217;s quite common to have quality issues with buying iron ore from India traders,and it8217;s not surprising to see the Fe grade 1-2 unit less than the contract,sometimes even 5-units lower,said an iron ore purchase official in a Jiangsu-based steel mill.

Normally we prefer to negotiate with traders for discounts,and arbitrage would just be our last way to seek a solution. But we are still passive as we pay 98 percent of the contract value in advance,and the final result could be that we lose money if we face some traders without credibility.

HIGH ORE PRICES

Ore prices remain close to historical highs despite concerns about China8217;s monetary tightening measures as well as the impact of a growing power shortage which could force steel mills to close down in the coming months.

Analysts are predicting that the market will remain tight this year,increasing the demand for lower grades.

It is representative of an iron ore market that is fully stretched at the moment,said Train.

It isn8217;t just about the Indians 8212; a lot of people have been struggling to supply the market on spec. There is such a rush that even the majors don8217;t have time to get the quality up.

The situation has been made considerably worse by supply problems in India,with the major ore producing state of Kartanaka banning exports of iron ore for about ten months.

Supply disruptions in Orissa have also led to a decrease in the amount of high-grade ore on the market.

China8217;s total imports from India in the first quarter of the year amounted to 26.465 million tonnes,15 percent of the total,down 20 percent compared to the same period of 2010,Chinese customs data shows.

Train said recent price movements indicate that China8217;s steel mills have had little problem dealing with lower-grade ores.

One thing that is interesting is that the premium for high-grade material is not that high,so it seems the Chinese are fully capable of using this low-grade material and just running their sinter plants at full pelt and then replacing the lost Fe units with more steel scrap.

AQSIQ blamed unscrupulous sellers for colluding with unscrupulous inspectors to create misleading quality certificates.

A trader based in Jiangsu province explained that some Chinese buyers make as much as 98 percent of the payment up front as soon as they have received quality certificates from the Indian ports.

By the time it reaches China,inspectors find that actual iron content levels could be as much as 3 percentage points lower than reported.

By then,they could in theory reject the cargoes,but that rarely happens. Sometimes the two sides will compromise by offering discounts,or the inspection results will be manipulated to reduce the discrepancies.

But some at the sharp end of the market said the problems were not only caused by Indian traders trying to disguise the quality of lower-grade ores,but also by middlemen worried about profits.

Neither side is blameless 8212; the market is a free-for-all,said a commodities broker based in Hong Kong.