The Shanxi provincial government's aim to set up a platform exchanging Chinese coking coal and coke for Brazilian iron ore is unlikely to proceed due to uncertainties underlying the process as well as the central Chinese governments rein's over exporting such resources, analysts told Interfax on Oct. 8.

 

"The Shanxi provincial government has not yet detailed plans to barter coking coal and coke for Brazilian iron ore, though the idea is currently favored by a number of government officials," an official with the Shanxi Provincial Development and Reform Commission, who wished to remain anonymous, told Interfax.

 

Nevertheless, Shanxi Province is planning to construct an additional railway linking its central and southern areas to either Qingdao or Rizhao port in eastern China's Shandong Province, specifically for cargo transport only, which would facilitate success of the proposed exchange platform, according to a 21st Century Business Herald report.

 

However, setting up such an exchange is not plain sailing. "There are many uncertainties in deciding the value of coking coal and coke, as well as the value of Brazilian iron ore, because price stability in the different markets varies significantly. Chinese coking coal and coke producers may likely get the short end of the stick due to Brazilian iron ore producer Vale's dominance over iron ore supply in the market as the largest iron ore producer in the world," Gao Bo, an analyst with Shanghai-based Mysteel, said.

 

This is not the first time such an exchange platform has been suggested.

 

Gao said that Shanxi authorities had approached the Brazilian government regarding direct exchanges of their coking coal and coke for Brazilian iron ore several years ago, but to no avail.

 

In a similar move, a Chinese import company named China Guofa InvestmentCo. Ltd. tried to strike up an agreement with Indian private iron ore producer TATA Group in 2004 to exchange China's coke for Indian iron ore, but the deal fell through.

 

Chinese government policies can also stand in the way of the success of such an exchange platform. "It is unlikely this kind of exchange will prevail in the future, as the Chinese government's control over coking coal and coke exports is getting tighter and tighter, with China cutting coke export quotas for Chinese companies by 1.15 percent year-on-year to12.01 million tons in 2008. In August this year, China raised the tax on coke exports to 40 percent and the tax on coking coal exports to 10 percent," analyst Li Jingkang, from Capital Futures, told Interfax.

 

China exported 9.68 million tons of coke during the first half of 2008, down 5.7 percent on an annual basis, and 28.68 million tons of coal including coking coal in first eight months, tumbling 18 percent year-on-year.

 

21st Century Business Herald reported that Li Ting, deputy director of the Economic Research Institute of the Shanxi Development and Reform Commission, proposed establishing an iron ore forward and spot trading market in Shandong Province in the future to trade iron ore imports from the possible barter with Brazil, and the large quantities of iron oreimports at both Qingdao and Rizhao ports, which accounted for over one-third of the national total in 2007.

 

Li believes that the proposed trading market, with its considerable trading volume, will influence the global iron ore market and therefore enhance Chinese steel mills' negotiating power in future iron ore import negotiations.

 

However, Zeng Jiesheng, an analyst with Mysteel, does not share Li's enthusiasm for his proposal.

 

"Current iron ore imports through the two ports, though large in volume, consist mainly of long-term contracted iron ore, as well as Indian iron ore that go directly to steel mills. Those that are to be sold on the spot market only account for approximately 20 percent of the total, which would not be sufficient to support a trading market," Li said.

 

Li was also pessimistic about the realization of the coking coal and coke-iron ore barter between Shanxi Province and Brazil, leaving little chance of an increase in spot iron ore supplies.

 

"Even if the trading market is finally established, it is unlikely to function in the influential way the officials assume it will. In fact, there are already various trading markets around China's major ports, and none of them have exhibited such an ability to impact the global market trend," Li said.

 

Shanxi is China's largest coking coal and coke producer and exporter, as well as one of the country's major steel production bases.

 

 

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