China and Iron Ore Prices

China Iron Ore

Iron Ore demand has scuttled China's attempt to pressure prices down for the raw material as they've come back to the negotiating table with major companies like BHP Billiton (NYSE:BHP) and Rio Tinto (NYSE:RTP) in order to attempt to make the type of deal which eluded them in 2009.

Last year China ended up paying more on the spot market than they would have if they had negotiated a contract, something they may try to avoid this year, although resumed talks are expected to be tough.

As mentioned, the key element undermining the Chinese strategy is demand for steel domestically, which is pushing iron ore prices up. Over the last year prices for iron ore have soared to almost twice what they were, rising to over $120 a metric ton on the spot market.

The other factor is the Chinese steel industry remains fragmented, which gives it less bargaining power at a time demand forces them to buy.

Steel production could rise as high as 640 million metric tons in China this year, in contrast to the 570 million metric tons of steel produced in 2009; about half of all steel in the world.

china chose to release stimulus money for infrastructure projects in the ongoing recession, and that of course has generated the demand for steel and iron ore we've been talking about.

There's no way out of it, the fragmented Chinese steel industry and the ongoing demand for steel will force China to pay a much higher price for iron ore than they want to, profiting Rio Tinto, BHP Billiton (NYSE:BHP) and Vale SA of Brazil.

Another clear beneficiary of the situation will be iron ore producer Cliffs Natural Resources (NYSE:CLF).

China Iron Ore Demand