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Stock Strategist

Chinese Steelmakers Resist Iron Ore Price Raise

Is steelmakers' plan to switch suppliers viable?

Chinese steelmakers this week rejected the mid-year price increase request from Brazilian iron ore producer  Vale  (RIO). Trade group China Iron and Steel Association said Chinese steelmakers, including major firms such as Baoshan Steel and Wuhan Iron & Steel, will not import iron ore from Vale in the short term due to the price dispute. Instead, these steelmakers are turning to domestic iron ore supplies, according to the association. (More details about this price dispute are available in Morningstar analyst Annie Sorich's note published on Sept. 24.

We don't believe the steelmakers' plan to switch suppliers is viable, as we know the domestically produced iron ore is an unlikely substitute for Vale's products due to the domestic ore's lower quality. However, we think Chinese steelmakers can afford to temporarily suspend imports from Vale and draw down their iron ore inventory, since the economic slowdown in China has been cooling steel demand from automakers and builders.

As the annual negotiation will start in late October for next year's supply contract, it remains to be seen if Vale is seriously pushing for the mid-year price raise, or is using the price raise to test the response from Chinese steelmakers as it gets ready for the annual negotiations.

Market Recap
For the past five days, the Shanghai Composite Index remained roughly flat at 2,294, while the Shenzhen Composite Index rose 5.7% to 7,559. The market stabilized after the government publicly voiced its support by announcing share buybacks of major commercial banks last week. More companies followed suit this week. According to one research firm, over 50 Chinese companies increased holdings in their publicly listed units over the past five days.

The stock market will be closed next week for the national day holidays.

Financials
Bank of East Asia Returns to Normal after Rumors of Interrupted Business
The third-largest lender in Hong Kong suffered from rumors of liquidity problems earlier this week, which prompted customers to queue for deposit withdrawal and led to a sharp stock price decline. The bank was quick to reject the rumor, and the HK monetary authority also stepped in, reiterating that the bank has sufficient capital.

Energy
China to Import More Oil from Venezuela
Venezuela will increase its export to China to 500,000 barrels a day in 2009 and potentially 1 million barrels a day in 2012, from the current level of 300,000 barrels, said Venezuelan President Hugo Chavez on his recent visit to China. In addition, the two countries plan to build three refineries jointly in China to process Venezuela's crude oil.

 China Petrochemical  Offers $1.8B for Canadian Oil and Natural Gas Producer
The acquisition target, Tanganyika Oil, is a Vancouver-based firm with operations in Syria and Egypt. This cash-based transaction has received the backing of the Tanganyika board.

Internet
C2C Transaction and Online Payment Users Grew in 2008's First Half
China's consumer-to-consumer (C2C) transaction totaled RMB 53 billion ($7.8 billion) in the first half, compared with RMB 56.1 billion for the whole year 2007, according to iResearch. Trading in apparel tops the list in volume, followed by mobile handsets and digital devices.

For the first six months, online payment users reached 130 million, or 51% of China's total Internet users. Alipay, a subsidiary of Alibaba, has a dominant share in this market, processing about 2 million transactions every day with a total value of RMB 450 million.

Thanks for contributions from Lun Lu, Iris Tan, Peter Liu and Feliz Li

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