Over the last couple of years I’ve had countless conversations with foreigners who do business with Chinese state-owned monopolies, and – during most of those conversations – we’ve eventually reached a point where the foreigner says something like this: “They’re still better party hacks than businessmen.” I’ve been inclined to believe that, generally, but my belief has been tempered by the lack of firm examples. So – a special thanks to Chen Xianwen, deputy director of the China Iron & Steel Association, who today announced that Australia’s iron miners “can experience revenge in the future” for having had the temerity to demand market prices. He has achieved Example-hood.
Bur first, some background.
For years, Australia’s two mining monoliths – BHP and Rio Tinto – benefited from an arrangement whereby they negotiated an annual “bench price” for the iron ore that they shipped to China’s largest steel mills (and elsewhere). Supposedly, this worked to everybody’s interest, by assuring set quantities and prices that couldn’t – theoretically – be buffeted by the market. Steel mills too small to negotiate a benchmark with the big Australians (and the Brazilians) were left scrounging the higher priced “spot market” for whatever was available from smaller mills (I’ve blogged this subject on several occasions).
Inevitably, the Chinese government grew wise to this arrangement and – in 2005 – announced that its largest steelmaker, state-owned Bao Steel, would now negotiate on behalf of all of the large Chinese ore importers. Theoretically, at least, this would assure smaller price increases. In reality, though, BHP and Rio have continued to take the Chinese to the cleaners in the bench price negotiations while, at the same time, extracting even bigger price hikes from small Chinese mills on the spot market. Starting in January, this set of circumstances so infuriated somebody in the Chinese government that – all of sudden! – spot iron ore shipments from Australia were blocked at Chinese ports. For some reason, they just couldn’t get in.
To their credit, the Australians haven’t blinked in the face of Chinese fury, and have made it clear that they expect an increase in excess of 65% for this year’s Chinese benchmark price (the Brazlians got 65%). So far, the Chinese haven’t agreed, but they will – if only because their world beating low-quality steel industry needs the ore.
It is under these circumstances that the China Iron & Steel Association announced its intention to extract “revenge.” The AFP reports the exchange as follows:
“Buyers and sellers should not be hostile — they should be interdependent,” the deputy director-general of the powerful China Iron and Steel Association, Chen Xianwen, told the Australian Financial Review.
“(But) if you have been aggressive, you can experience revenge in the future,” Chen said in an interview in Beijing.
The article goes on to explain that – under the right circumstances – the Chinese will take their business elsewhere. Now, neglecting for the moment that Australia supplies China with roughly 40% of its ore – what on Earth could Chen have expected to achieve by these comments? Surely, he doesn’t expect the Australians to go back to their old price-fixing ways [what he means by “interdependent”?) now that the Chinese have finally decided that cartel behavior – on their own part – is the way to play the game. At some point, I’m sure, China’s state-owned sector will be run by people who have real world business experience in private companies. But until that day, those companies – and men like Chen Xianwen – will continue to be out-foxed – and out-classed – by businesses and executives versed in international markets, first. Let’s be serious: Cut-throat party politics might be how Chen rose within his trade association, but it certainly won’t keep him there if he keeps opening his mouth like this.