Chapter 303: Iron Ore Negotiations
Most of the company's management had already returned from vacation early.
Li Tang convened a mobilization meeting, offering some words of encouragement to the team.
Li Xinqi was still vacationing abroad, so Li Tang couldn't personally deliver the gifts entrusted to him by his parents. Instead, he handed them over to Zhou Zhihan.
Pan Yuexing, accompanied by his technical team, had already arrived in Yanjing early. All necessary preparations for their overseas journey, including paperwork and project arrangements, went smoothly.
Soon, they boarded a plane headed for Guinea, Africa.
The Simandou iron ore exploration project initially progressed slowly due to the lack of existing geological data.
However, the process of locating ore deposits went surprisingly smoothly.
High-grade hematite deposits, with iron content surpassing 60%, were clearly visible on the surface. Additionally, geophysical instruments easily detected such massive hematite formations.
Moving northward from Mount Nimba, following the geological formation hosting the ore layer, the team could consistently identify continuous mineralization belts.
Unfortunately, mining rights for Simandou's southern areas—Blocks 3 and 4—still belonged to Newfield Company, effectively controlled by Rio Tinto. Thus, Pan Yuexing and his team could only carry out exploration work in Blocks 1 and 2 further north.
Having encountered numerous obstacles while searching for mineral resources domestically, Pan Yuexing deeply understood that back in China, from the 1960s and 1970s onward, generations of geological pioneers had extensively surveyed every piece of land.
Any easily discoverable mineral deposits would have long since been found.
Nowadays, exploration within China demanded advanced technology or unique geological perspectives to achieve further breakthroughs.
Yet, on the land of Guinea, they could simply walk around the hillsides, take quick measurements of weathered reddish-brown rocks, and effortlessly identify iron deposits exceeding 60% iron content.
No wonder Guinea was famously known as a "geological miracle," a land seemingly kissed by God himself.
Apart from having the world's largest reserves of bauxite, this small nation also possessed two world-class high-grade iron ore deposits—Mount Nimba and Simandou!
If their leadership had strategic foresight, trained local exploration teams, acquired mining rights themselves, and pursued focused development, just a single ore deposit could ensure the nation's prosperity.
Unfortunately, Guinea was among the world's most corrupt and impoverished nations, heavily reliant on manipulative financial aid from Western countries.
During Li Tang's brief three-month period carrying out exploration there, officials from Guinea's mining and geology departments showed almost no interest in the technical progress of the project—a scenario unimaginable in China.
However, various local government officials took a keen interest in Li Tang, the businessman from China.
Whenever government offices needed new furniture, they came to Li Tang for help.
If villagers got sick and couldn't afford treatment, they sought Li Tang's donations.
Even when shepherds lost a few goats, they would approach Li Tang demanding compensation.
You never knew what reasons they'd invent next to ask you for money.
Fortunately, local officials hadn't seen much of the wider world. Although their demands were frequent, their appetites were small—usually, just a couple hundred yuan each time could settle the matter.
Such daily nuisances eventually became routine. On days when no one came begging, Li Tang would almost feel something was missing.
But these trivial frustrations didn't dampen the exploration team's enthusiasm.
Despite harsh living conditions, discovering new iron deposits every day filled them with a sense of achievement.
"The spot price of standard-grade iron ore has already exceeded 60 US dollars per ton," Yan Hongliang said, his hands clasped before him as he bowed slightly to the young general manager in front of him.
Li Zhaocai had been in charge for a year, and he'd experienced a great deal during that time.
The formerly carefree youth had visibly matured, though he still sported long, smooth hair as a mark of individuality.
When he'd urgently flown back from Australia and seen his all-powerful father lying lifeless, his usually commanding face pale and distorted, a terrifying black wound at his forehead, something in him had changed permanently.
After completing his father's funeral arrangements, he'd returned to the company amidst widespread skepticism to take charge of Haixin Steel.
People had suggested he hire a professional manager to lead the company, but Li Zhaocai chose instead to channel his grief into determination—resolving to fulfill his father's uncompleted ambition: bringing Haixin Steel to greatness.
Under Li Zhaocai's leadership in 2003, Haixin Steel achieved record-breaking revenue of over three billion yuan. The moment those results were published, all internal doubts vanished instantly.
Looking at Yan Hongliang—an experienced veteran around his father's age, who had helped build Haixin Steel into its current success—Li Zhaocai calmly responded: "Long-term contracted iron ore prices are locked at forty dollars per ton. We can rely on contract supply without needing to buy from the spot market."
Even after a year of unprecedented success, the young leader still displayed clear signs of inexperience.
He knew little about steel production and business operations.
From the day he took over, his attention was constantly fixated on the company's financial numbers. Trained in economics and management, he understood numbers, yet didn't fully grasp that production and management were about more than merely earning and spending money.
Still, one fortunate point remained: since taking the helm, he'd avoided making radical changes, instead maintaining the strategic course his father had set for Haixin Steel, while gradually incorporating his own perspective.
Yan Hongliang had no wish to overstep his boundaries. Managing production and procurement already occupied all his energy.
"Our business volume this year far exceeds initial projections. With last year's revenue at over three billion yuan, given current conditions, there's a high likelihood we'll exceed five billion yuan this year," Yan explained patiently, glancing at the young chairman. "The iron ore supply contracts we signed last year are clearly inadequate. We're being forced to buy large amounts from the spot market."
"Sixty dollars on the spot market versus forty for the contracted price—this gap is far too large!" Li Zhaocai protested unhappily, massaging his rounded cheeks.
"The current raw materials market is indeed irrational," Yan Hongliang responded carefully, always maintaining professionalism despite Li Zhaocai's youth. This discipline had allowed him to retain his position as vice president at Haixin Steel.
"So why exactly are you telling me this now?" Li Zhaocai still didn't fully grasp Yan's point.
"Since last year, Chinese steel companies have begun participating in international iron ore price negotiations," Yan explained. He'd increasingly come to understand how critical controlling production costs had become.
Although the steel industry had enjoyed steady growth over recent years, soaring iron ore prices combined with sluggish steel price increases had significantly reduced profit margins.
Even if annual revenue topped five billion yuan this year, actual profits might not surpass last year's results. If this trend continued, declining profits would soon become inevitable.
As a seasoned industry expert, Yan clearly saw impending industry difficulties ahead.
Meeting Li Zhaocai's puzzled gaze, he continued, "Mid-year is approaching, and the Steel Association will soon launch iron ore price negotiations. My suggestion is that we must participate—no matter what!"
"How would we participate?" Li Zhaocai was aware of Haixin Steel's positioning in the market. As a private enterprise, they couldn't possibly compare with massive state-owned entities like Haigang Steel.
Haixin Steel generated annual revenues in billions, whereas state giants had revenues in the hundreds of billions. They simply weren't in the same league.
Yan Hongliang understood this but was deeply anxious. "The three major iron ore suppliers' allocations to domestic steel mills are mostly fixed. If we can secure even slightly more long-term contracted ore, it's worth fighting for!"
"Are we supposed to compete against Haigang Steel for contracted supply quotas?"
"At the very least, we must put pressure on the Steel Association!" Yan said passionately. "The total amount available is limited. Any additional ton we secure benefits us greatly. Otherwise, next year we'll again be forced into heavy spot market purchases at higher costs. If today's spot price is sixty dollars per ton, who knows—next year it might hit one hundred, and we'll be losing money directly!"
"What should we do, then?" Li Zhaocai asked, feeling inexperienced.
"We need to approach the Steel Association and secure our place at the iron ore negotiation table—at the very least, we should meet with the three major iron ore companies' senior management to establish direct relationships."
Yan Hongliang had worked at Haixin Steel for many years. Yet, his dealings had always been limited to the local representatives of major iron ore suppliers—he'd never met the top executives directly.
"Alright," Li Zhaocai nodded in agreement.
Yet, when they arrived at the Steel Association, they found many others with the exact same idea.
Association staff received them warmly but politely refused their requests to meet the president or senior officials directly.
President Bao Yanyao was overwhelmed, already having met with numerous steel companies. Aging and exhausted, Bao had to focus on overarching strategic goals rather than individual demands.
China had over a thousand steel mills. If every company's demand were met, the fierce competition for iron ore at the ports wouldn't even exist.
Clearly, in iron ore trade, the power to set prices rested not in China's hands but with the three major international producers.
At that moment, Lu Chenyi entered Bao's office. "I saw plenty of industry peers outside."
"Everyone wants to directly participate in iron ore price negotiations," Bao sighed.
"Last year, when we arrived in Singapore, Japan's Nippon Steel had already negotiated a deal. The suppliers simply handed us the finalized forty-dollar price," Lu recounted from his previous experience.
"China is now the world's largest iron ore importer," Bao declared firmly. "We deserve a voice—and we must influence the price!"
"How will the negotiations proceed this year? Will each steel company and trader negotiate individually with the three iron ore giants, signing their own contracts, or will we do it like last year?" asked Lu Chenyi.
"The spot market price has been driven up precisely because our steel companies are competing among themselves. Everyone is scrambling to secure iron ore, causing chaos, leading to vicious competition, which step-by-step drives up prices," Bao Yanyao responded, having clearly decided on a strategy. "If every company gets involved in negotiations, who knows how high the benchmark prices will soar. This year, we should stick with last year's approach: your Haigang Steel will represent our entire steel industry in negotiations with the three iron ore giants."
"What price range is acceptable for everyone?" Lu Chenyi asked.
"Naturally, each steel company wants the lowest possible price, including your Haigang Steel. But this year's situation remains one of undersupply. Additionally, the US dollar has depreciated, labor costs have risen, and transportation and insurance expenses are also significantly higher than last year."
Bao Yanyao's primary goal, representing the Steel Association, was to ensure the sustainable and healthy development of the entire industry chain, rather than squeezing any one sector excessively.
Years ago, when iron ore prices were extremely low, many mining operations ran at a loss—clearly detrimental to the industry's long-term development. Conversely, excessively high iron ore prices would erode steel companies' profits.
Striking a balance between these two extremes, determining an optimal price for industry sustainability, was extremely challenging.
"New steel mills are popping up everywhere, thinking that steel production is easy money," Lu Chenyi noted. "The competition pressure on us is enormous. If iron ore prices keep surging, steel production itself will suffer."
As China's largest steel enterprise, Haigang Steel recognized this issue early on, strategically expanding into higher-value downstream sectors.
"Our expert analysis concluded that around 50 dollars per ton for iron ore is a reasonable price, allowing most steel companies sufficient profitability." Bao handed Lu Chenyi a document. "However, we anticipate the big three iron ore suppliers won't accept this. Therefore, our negotiation must have a bottom line at 55 dollars per ton."
"55 dollars per ton as our bottom line?" Lu Chenyi glanced carefully at the document before cautiously putting it away, feeling this price was still a bit high. Of course, negotiation meant never immediately revealing one's lowest limit.
"Last year, China imported nearly 150 million tons of iron ore," Bao handed over another document. "In just the first half of this year, we've already imported 100 million tons! Our imports increased by 40% year-on-year!"
Lu Chenyi was startled by this figure. Initially, he thought only Haigang Steel had significantly increased its iron ore demand. Yet surprisingly, nearly every steel company was aggressively importing, mainly from the spot market.
This explained the frenzy driving spot market prices upward—domestic firms were bidding up the price against themselves.
"Combining spot and contracted ore prices, the current average landed price of iron ore has reached 61 dollars per ton!"
"Average landed price of 61 dollars per ton?" Lu Chenyi understood the significance immediately. He quickly calculated and then concluded, "Compared to last year, this increase means steel prices need to rise by around 300 yuan per ton just to offset this cost. Yet steel prices can't simply increase freely. Compared to last year, steel prices haven't risen by nearly enough."
"Your Haigang Steel is relatively lucky; most of your iron ore supply is at contracted prices. Smaller steel mills without long-term contracts, especially private enterprises, are seeing their profits severely squeezed."
"This year's negotiations will be even tougher than last year," Lu Chenyi acknowledged gravely.
After coordinating with China's major steel mills, Lu Chenyi flew with his team to Singapore.
The first meeting was scheduled with BHP Billiton.
BHP Billiton was the world's largest diversified mining giant, not only leading globally in iron ore production but also influential in bauxite, copper, oil, and gas markets. With increasing global demand, BHP had significantly ramped up production, sales, and logistics investments.
In the first two quarters alone, their iron ore output had reached a record 43 million tons, ranking third globally behind Vale and Rio Tinto.
Brazil's Vale led with over 100 million tons produced in the first half of the year. With iron ore highly profitable, every producer was racing to cash in.
Graeme, a typically arrogant negotiator from BHP Billiton, greeted Lu Chenyi with rare cordiality. After all, Haigang Steel had quietly become the largest steel producer globally, so maintaining good relations meant less sales pressure for iron ore suppliers.
"Good to see you again, old friend!" Graeme greeted warmly.
After brief pleasantries, both sides quickly got to business.
"According to your projections, BHP Billiton's iron ore supply next year will increase further, surpassing the 100-million-ton mark," Lu Chenyi began cautiously, fully prepared. "Vale and Rio Tinto have also confirmed higher output. This inevitably leads to oversupply in the global market, causing price drops."
His underlying message was clear: as supply increased, prices would inevitably fall, so the extreme premium China's domestic spot market currently saw above the contracted price wouldn't last.
"You should reconsider your aggressive pricing, or you might struggle to sell next year," Lu implied directly.
"Our increased output matches global demand," Graeme responded calmly. "Even as production increases, global demand is also rising steadily."
Graeme wasn't concerned, confident China's iron ore demand would remain strong next year. If oversupply occurred, the three mining giants would simply coordinate output cuts. They were well-versed in controlling global prices through supply adjustments.
"I believe iron ore prices should decrease next year," Lu boldly insisted, pressing to lower last year's 40-dollar benchmark. Negotiation meant haggling over prices, after all. Given stable supply volumes and quality, the primary sticking point was price.
Graeme shook his head immediately, repeating firmly, "No, no, no..."
Throughout this past year, Haigang Steel had comfortably secured iron ore at just 40 dollars per ton, insulated from the soaring spot prices, and thus enjoying significantly higher profits compared to peers. But representing China's steel industry meant considering the broader interests, not just their own.
"You've already made huge profits. At 40 dollars per ton, you earn at least 13 dollars profit per ton!" Lu argued indignantly.
"Yes, we made contracts with large companies like you at 40 dollars, supplying the best quality ore worldwide. But we've lost significantly this year," Graeme countered sharply. "Smaller suppliers from Africa and small Australian mines selling directly to China's spot market get 61 dollars per ton—21 dollars higher than our contracted price!"
This huge price gap explained suppliers' preference for spot market sales. Yet due to binding contracts, they were forced to continue supplying lower-priced contracted ore.
Lu exchanged knowing glances with his team. Haigang Steel had greatly benefited from the substantial contracted volumes agreed last year.
"This situation is a temporary market anomaly," Lu reasoned. Such extreme price gaps existed only in China.
Yet BHP Billiton saw opportunity in this anomaly.
"Our price for next year's standard iron ore grade is set firmly at 61 dollars per ton," Graeme announced decisively.
"That's far too high!" Lu protested, shaking his head. "The maximum we can offer is 42 dollars per ton."
"61 dollars per ton—non-negotiable," Graeme insisted stubbornly.
"How about 45 dollars per ton?" Lu conceded slightly.
"61 dollars is our final price. If you refuse, we simply won't sign any contracts and will sell directly into your spot market instead," Graeme threatened confidently.
A 21-dollar per ton premium meant potentially an extra two billion dollars profit on a 100-million-ton output, so BHP Billiton was perfectly comfortable supplying China's spot market exclusively.
Negotiations ended bitterly.
Though subsequent talks occurred with Rio Tinto and Vale, none yielded acceptable results. Soon afterward, news emerged that Japan's Nippon Steel had agreed with Rio Tinto to the exact price BHP Billiton demanded: 61 dollars per ton.
Nippon Steel even owned shares in Rio Tinto's Australian mines!
Following Nippon Steel's lead, Korean and European steelmakers quickly accepted the higher prices, publicly blaming Chinese steel companies for inflating spot market prices and thus driving up the negotiated benchmark.
"It's a coordinated act!" a frustrated member of the Chinese delegation accused bitterly.
Lu Chenyi felt helpless.
A price of 61 dollars per ton—how could he possibly justify this result to the Steel Association or to domestic steel companies?
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