An Analysis Of International Iron Ore Price Negotiation Mechanism And China's Reaction

China has become the world's largest iron ore importer and the second largest in petroleum import, but China has no pricing initiative in these staple raw materials, which has intrigued extensive attention among the related people, as this situation is not good for the economic safety and state interest but at the same time of great importance to many industries.The present international iron ore price negotiation system is run like this: trade begins from every fiscal year as on April 1^st, and before that the global big three, CVRD from Brazil, BHP Billtion and RioTinto from Australia, will negotiate a Benchmark contract price for a year with the leading buyers in a couple of months. The negotiation usually goes for several rounds, and once anyone of the big three agrees with anyone of the buyers at a price the yearly negotiation is over. All of the countries involved in the iron ore trade have to accept the price without any resistance. Since 2004 Baosteel has been taken part in the negotiation representing the 14 Chinese steel makers, which was authorized by the China's Iron and Steel Association (CISA).The paper focuses on the four negotiations Baosteel has gone through, analyzing the strategies that suppliers and demanders have used by means of Game Theory and two equilibium models, which are specifically the alternating offers model and bargaining model with incomplete information. China's bargaining position is found out. A sum-up of the measures to improve the bargaining position is also given. The paper intends to be a guide for the future negotiation and industry development.The results reveal that China has gone very far in the negotiation for the last four years. At first there was no pricing initiative, but Baosteel tried hard in seizing it from both the producers and other buyers and finally succeded for the results turned out to be very good in the 2007 negotiation. However, it is still too early to say that China has a bright future in price setting. The key is to enhance the power not only in negotiation strategies but also in industrial development of steel and iron. More investigations are needed in world market and long-term strategy in raw material structure adjustment. There is still a long way to go in negotiation and only when all the problems are solved could China hold a steady position in world pricing system.