Baosteel Moves To Secure Brazilian Iron Ore
Sources With JV
Baosteel, China's largest steel producer, is moving to
secure an iron ore source by setting up a joint venture
steel mill in Brazil with CVRD, the world's largest iron
ore producer.
The first stage of the agreement is a US$1-1.4 billion
integrated mill with nearly 4 million tons of steel slab
capacity. The second part of the agreement envisages a
second mill to produce cold-rolled steel in 3 to 5 years
if demand remains strong.
Over the past few years, CVRD has become Baosteel's largest
supplier of iron ore from Brazil's northeastern region.
Most of the South American economies, which are heavily
reliant on commodities, have come to rely on China as
their largest single buyer.
Iron ore prices have gone up by 20 percent over the past
year, and combined with higher shipping costs, have forced
up the price of steel. Instead of building steel mills
in China to satisfy China's current demands, the Chinese
government is encouraging major makers to invest in operations
overseas, and exporting from the local mills back to China.
The rationale for this is two-fold: steel manufacture
is considered to be a high-pollution industry which the
government does not want to encourage in China and the
government does not want to have too much unused capacity
as demand falls off in the Chinese market. By having a
local presence in manufacturing capacity, some of the
steel output can be exported to other markets outside
China.
China has a significant number of state-owned enterprise
steel mills which are money-losers, but have had a temporary
lift because of current high domestic demand. Many of
these mills were built in the 70s and 80s, when Chinese
government policy still favored heavy industries. At the
time, these mills brought job security to a significant
part of the working population, especially in China's
Northeast. Currently, the northeast is one of China's
most economically depressed regions.
From a social and political viewpoint, it would be difficult
to justify large-scale investments in new steel production
when so many have lost their jobs.
While many foreign producers have said that there will
be too much capacity in China, they have not been able
to get accurate figures on steel production, capacity
and demand from Chinese officials and businessmen.
Obviously, the Chinese are not anxious to have outside
companies invest in steel production and sales in China.
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