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Steel industry in China has developed over several decades into the world biggest. China accounted for 36.4% of world steel production in 2007. It has driven by rapid modernization of its economy, construction, infrastructure and manufacturing industries.
The steel industry was small and sparsely populated at the start of the twentieth century and during the both world wars. Most of the steel infrastructure were destroyed during the world and using Soviet technologies. China lagged the western countries in its steel industry development even using central planning during the early communist rules.
It produced 123 million tons of steel in 1999. After its ascension to the WTO it aggressively expanded its production for its growing appetite of manufacturing industries such as automotive vehicles, consumer electronics and building materials.
In 2008 raw materials such as Iron ore prices grew and China had to reluctantly agree to price increases by the three largest iron ore producers in the world; BHP Billiton, Rio Tinto and Vale.
During the Global financial crisis the Chinese steel mills won price reprieve as demands from their customers slowed. When the demand started to pick up again in 2009 and in 2010, the price crept back up due to higher demand for automobiles, low interest rates, government fiscal stimulus around the world. Prices for iron ore were negotiated on a annual contract pricing scheme.
Australian iron ore producers were not hap that iron prices did not reflect Spot market pricing. In 2010 pressure from BHP Billiton and Rio Tinto to move to a quarterly based index pricing succeeded. Many Japanese steel mills and Chinese steel companies had to follow as demand for raw materials heated up.
Spot-basis pricing has caused problems for steel manufacturers as exposed them to price fluctuation in the market and reduce stability of resource supply. Steel mills prefer long term pricing to hedge against cost and maintain raw material supply stability.
Rio Tinto has said it will cancel contracts and sell the steel on the spot markets if Chinese steel mills back down on the new quarterly pricing regime.
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