Behind China’s steel pricing farce

Behind the smoke and mirrors in China, it is time to focus on China’s steel majors and consider how the highly publicised restructuring is in fact a diversion to conceal rising concern within the CCP.

Evidence of the extent of this concern was Vice Foreign Minister Liu Jieyu’s hurried visit to Australia to tell Prime Minister Rudd not to interfere in China’s internal affairs, demand that Australia respect China’s legal system, and to claim that Stern Hu and his co-workers would receive a fair trial.

Conflicts of interest in China’s justice system

Senior executives in China’s state-owned enterprises, and especially those in the key industries of energy, steel, coal and power generation, face a clearly defined conflict of interest when giving evidence in China’s courts.

To secure and retain their positions in these industries, membership of the CCP is mandatory and requires absolute obedience and loyalty, whereby duty is first, and foremost to the interest of the CCP, and then China as a whole. Everything else has a lesser priority. There are severe penalties for breaches that can seriously affect the future prospects of both individual and family.

Before answering questions from prosecuting or defence lawyers, all members are bound by their sworn duty and loyalty to the CCP before all else. In China, the CCP is the highest law and that leaves the obvious question of the veracity of evidence given by executives of state-owned enterprises.

This raises the question of the credibility of evidence that could be contrary to CCP and the state’s interest. Can the demand for loyalty and commitment to the interests of the CCP, be used as a form of duress for a member of the CCP not to answer truthfully?

Can China’s legal system be considered credible when it comes to any trial involving the charges facing Hu and his colleagues, and evidence given by senior executives of the major state-owned steel mills who are dedicated members of the CCP? Evidence given under these circumstances has the real potential to be unreliable, at best.

Stern Hu’s own Chinese national colleagues with families in China will also face the same dilemma.

Another weakness is China’s judiciary. All judges are CCP members and charged with protecting China’s interests and national security.

The pricing problem is one of Beijing’s own creations

Since the beginning of 2009, China’s steel mills purchased just over half of all iron ore imports from the miners. Of the 297 million tonnes imported into China during the 1st half 2009, traders purchased 131 million tonnes.

China claims that the decline in mill purchases confirmed falling demand, supporting its claim in price negotiations. It was a juvenile and transparent move to attempt to influence negotiations.

The 131 million tonnes purchased by the traders however, represented a 30 per cent year on year increase. When on-sold to steel mills, the price carries a substantial mark-up, pushing the landed price well above that of the larger mill contracts.