By Olivia Chung

HONG KONG – Rio Tinto executives, waiting to hear the fate of colleagues held in Shanghai on charges of bribery and stealing commercial secrets, may have to wait even longer for the outcome of usually contentious price negotiations for supplying iron ore to China. The annual talks involving Chinese steel companies and global ore suppliers set the price for the 12 months from April 1.

Rio’s former lead iron ore negotiator in China, Stern Hu, is in custody with three other employees of the world’s third-largest mining company – Liu Caikui, Ge Minqiang and Wang Yong. A closed-court trial on charges that they infringed commercial secrets closed on Wednesday after they earlier pleaded guilty to accepting bribes. Liu, alone of the four, also pleaded guilty to the commercial secrets charges, according to reports. A verdict and sentencing is not now expected to be announced for at least a month.

Court proceedings detailed in the China Business Daily on Tuesday reported that the Rio employees took 89.18 million yuan (US$13 million) in bribes from small- and medium-sized privatesteel mills and trading companies. The four defendants could face sentences of at least five years in jail on the bribery charges. Under China’s criminal law, a person who is convicted of stealing commercial secrets faces a maximum penalty of seven years.

An employee of Chinese steelmaker Shougang and one of Laiwu Steel have also been charged with stealing trade secrets and accepting bribes, according to Chinese media reports.

Sam Walsh, the chief executive of Rio Tinto’s iron ore division told Dow Jones Newswires that the company would “respect the outcome” of the trial of the Rio workers, and declined to comment further. Rio Tinto previously insisted that its employees were innocent.

With Hu, an Australian citizen, in custody since last July, Ian Bauert, Rio’s former managing director of sales and marketing, was appointed in February to lead the company’s 160 employees in Beijing, Shanghai and Guangzhou.

The court case has strained ties between China and Australia, but this year’s price negotiations appear to have proceeded more smoothly than last year, when talks collapsed. Rio has also kissed and made up with its largest shareholder, China’s state-owned aluminum giant Chinalco, after falling out last year over the Chinese company’s wish to increase its Rio holding. The two agreed this week to develop an iron ore reserve in the West African country of Guinea.

There is also growing enthusiasm about changing the base of the price talks, possibly to quarterly rather than annual review periods. That might reduce the acrimony the negotiations generate while also minimizing the gap between agreed benchmark contract prices and prices on the open, or spot, market.

The stakes in the annual negotiations on contract prices for iron ore, the key component in steel manufacturing, have been rising along with China’s economic growth. Based on last year’s contract price of US$62 per tonne, imports were worth about $18.6 billion in 2009, not including spot-market deals.

On the one side of the talks is China, the world’s biggest ore importer, and on the other side Brazilian miner Vale, the world largest iron-ore producer, and Australian miners Rio Tinto and BHP Billiton, the two next largest.

Luo Bingsheng, vice chairman of China Iron and Steel Association (CISA), China’s chief negotiator, said at an industry conference last Friday that Chinese steel mills face an increase of as much as 100% in iron ore term prices for 2010. CISA earlier confirmed that Rio Tinto and BHP had asked for a 40% price rise in 2010-11 contract price from a year ago, after Vale asked for a 90% to 100% increase.

Last year, China failed to reach an agreement with the miners after the CISA insisted on a 45% discount over 2008 prices, rather than the 33% cut accepted by other Asian steel mills.

Domestic steel mills subsequently turned to the spot markets for ore supplies, and many Chinese mills signed individual contracts with the big three miners after accepting the 33% cut without making it public.

Complicating negotiations, spot iron-ore prices have surged to a record high in recent months. Spot prices rose to above $130 per tonne, including freight, in February, more than double the $62 benchmark reached by the big three ore producers for fiscal 2009.
China’s steel output is expected to increase 8.6% this year to 621.5 million tonnes, driven in part by demand for infrastructure projects funded by the country’s 4 trillion yuan stimulus plan, according to a report from consulting company Mysteel.com.

“Chinese steel production continues at a pace fast enough to drive up demand for steel raw materials, while the rest of the world is still in recovery mode,” JP Morgan said in the report this month.
China imported 628 million tons of iron ore in 2009, up about 42% from a year ago, mainly from Australia and Brazil, accounting for nearly 70% of the country’s total consumption.

At the same time, steel mills’ profits have been squeezed. Combined profit at 68 big and medium-sized steel makers in China tumbled 31.4% to 55.4 billion yuan in 2009 from a year earlier, according to CISA data.

“A hefty surge in iron ore prices will make Chinese mills suffer losses,” said Wang Huachun, an analyst at Rising Securities Co.
China’s steel mills will not agree to iron ore prices that are higher than their products can be sold for, Deng Qilin, president of Wuhan Iron & Steel Group, also a former chairman of CISA, said recently.

The Ministry of Commerce and the Ministry of Industry andInformation Technology vowed last Tuesday to support Chinesesteel mills for the first time, including adopting necessary trade measures, in their annual iron ore negotiations with the global suppliers. The ministry did not give details.

Luo of CISA said Chinese steel mills have always been at a disadvantage in the annual iron ore price talks due to the large number of such firms scattered across the nation and the soaring demand for iron ore. CISA has called for the authorities to cut the number of licensed importers and to promote a system where there is a unified price for iron ore.

“A unified iron ore price for all imports not only could regulate the market, but also erase the differences between long-term and spot prices,” he said.

Rio Tinto’s Walsh said in Perth, Western Australia, on Tuesday that the wide disparity between the existing benchmark system and the spot market needed to be addressed.

“The benchmark system does have to evolve,”” Walsh said. “Whether it evolves to a quarterly system or some other mechanism, time will actually tell. It will be something that actually reflects the market dynamics – that’s what we’re seeing.”

Han Feng, deputy chief of Asia-Pacific studies at the Chinese Academy of Social Sciences, said the tough negotiation between China’s steel mills and the international iron ore giants will not affect the improving relations between Beijing and Canberra.

“The heated disagreement is between the businesses, not between the governments,” Han said.

China may import 610 million tonnes of iron ore in 2010, near the 2009 record, the SteelGuru web site reported, citing Chinese steel giant Shougang Corp.

That, however, may depend on whether Beijing maintains its economic stimulus, or cut it back to avoid overheating the economy, according to Zhu Jimin, chairman of Beijing based Shougang. Chinese steel demand may grow by 8% to 10%, he said. “The Chinese government is facing a dilemma of whether to pare back the stimulus or to continue and to what extent. The decision will impact Chinese steel demand growth this year.”

China’s iron ore imports soared 42% to a record 628 million tonnes in 2009, while steel production in the country rose 14%, also to a record.

Olivia Chung is a senior Asia Times Online reporter