China Scrap Importers Renegotiate Contracts On Plunging Prices

BEIJING--Chinese scrap importers have said the plunging steel market is forcing them to renegotiate contracts with U.S. exporters, as smaller mills close and importers turn to cheaper Japanese shipments.

They were responding to charges by the U.S.-based Institute of Scrap Recycling Industries last week of Chinese firms reneging on hundreds of millions of dollars worth of contracts with U.S. exporters.

Institute officials said they have received complaints on an "unprecedented" scale on the issue, "well over 100 complaints from at least 10%" of its membership of 16,000.

Commodity prices have fallen so rapidly after the Chinese national holidays in late September that many importers began to ask exporters to renegotiate contracts, a Chinese importer said.

"Importers have to go with the mills' prices, and mills aren't accepting bulk scrap any more," said Marrier Wu, general manager of Shanghai China Steel Group.

"The mills tell importers they will only take the scrap if the price is cut, so importers ask the exporters to renegotiate. The U.S. firms, as a whole, would renegotiate the price."

The Chinese firms that Dow Jones Newswires spoke to said they weren't involved in reneging on deals, but were only commenting on what they saw in the industry.

The institute said exporters were being forced to renegotiate after shipments arrived, at the barrel of snowballing costs while stranded at ports.

Its officials said a pattern of "quality threats" was emerging among Chinese importers.

"In one case, when the (scrap iron) shipment arrived, a 'bomb' was allegedly found in the shipment," said Robin Wiener, the institute's president.

"They sent us pictures, and they looked like shells, but certainly didn't look like live bombs. Then the Chinese said that if the (shipment's) prices were cut, they would take care of the 'bomb'."

The Chinese firms told Dow Jones they weren't aware of such threats, but said exporters readily agree to renegotiate contracts.

Wiener said attorneys have advised the institute the cost of litigation to enforce the contracts would be potentially high and without a guarantee the lost profits would be recovered.

The Chinese firms blame it on the economy. Scrap steel that used to cost $178 a metric ton in July now changes hands at $50/ton, said Haidee Deng, sales manager for Shenzhen Feixing Xunda. "Virtually nobody is importing scrap any more. It's practically valueless."

Scores of scrap importers in the Shanghai area have closed or temporarily suspended operations as a result of the squeeze on steel prices, said Sun Zixiao, of Shanghai Wanyuan Group.

But Wu acknowledged much depends on "relationships. If the relationship between the importer and exporter is good, the prices could be locked in."

But now, those relationships - good or bad - are in jeopardy, Wiener said.

"This will change the terms under which our sellers sell into China. I can't tell you what the (new) terms will be, but I believe significant changes will be made."

Wiener said the institute has sought help from the U.S. Commerce Department, but the department has advised her the issue appeared to be contractual disputes between private parties.

"They're very sympathetic, but without any violation of the World Trade Organization rules or bilateral agreements it's very hard for the U.S. government to intervene," she said.

The institute has also approached Beijing's General Administration of Quality Supervision, Inspection and Quarantine, which controls licenses for importers and exporters, but hasn't received a response.

Administration officials didn't reply to a message for comment from Dow Jones Newswires Wednesday.

Wu said Chinese importers are now turning to Japanese scrap.

"They get here in 2-3 days, compared to 10-15 days from the U.S. And the shipping is free."

-By Chuin-Wei Yap, Dow Jones Newswires; 8610 6588 5848; chuin-wei.yap@dowjones.com