Supplying Iron Ore to China – a Lawyer’s Perspective

China is the world’s largest importer of iron ore used for both domestic consumption and for production of finished goods for export.  China has seen increases in imports of iron ore of over 11% per year on average over the past five years and is expected to continue average annual increases of over 7.0% per year over the next five years.

In the wake of this enormous demand and the expected increases in import activity, dealing with the legal aspects of contracting for the supply of iron ore to companies in China is critical to the success of such endeavors.  The following are some insights and experiences from a legal perspective with regard to doing this type of business that I believe should not be overlooked.

Customers drive the procurement process by indentifying required product specifications, expected pricing and payment terms, and quantities.  They also have standardized contract terms and conditions, warranty conditions, quality and inspection criteria and logistics requirements. While the significant business terms are common in most agreements across the globe, when dealing in China, customers use a variety of forms in Chinese and English that often times require significant expertise with individuals capable of working in both languages in order to finalize a contract to include all of the agreed on business terms in the proper form for all parties.

While standard terms are often not altered, business negotiators must work closely with legal counsel to negotiate only the issues that will have a significant business or legal affect on the successful completion of the contract. This requires experience in dealing with the supplier to know what accommodations they will accept based on prior business dealings and liability exposure.  Also, it is necessary for both the business negotiator and legal counsel to be sensitive to regional cultures and personalities. For example, the concept of guanxi is essential to the success of every business deal. Guanxi describes the importance of doing business based on personal relationships; it is one of the key social concepts that unite China culturally. However, guanxi can be interpreted differently by members of different generations, and can be accorded different levels of importance by those of the same generation. Individuals who are sensitive to the subtle cultural nuances can distinguish between essential parties and time-wasters and identify euphemisms to distinguish between good and bad reactions to negotiations. Once these key social concepts are understood and put into practice, the terms and conditions of the contract can be easily worked out to everyone’s satisfaction. The ability to understand and apply these cultural aspects of negotiating contracts with customers in China is critical and often very challenging without an experienced multi-cultural team.

Take-it-or-leave-it deals in China are culturally rooted — inexorable situations that force suppliers to take on some amount of risk. In these instances, it is important to recognize the difference between real risk and theoretical risk. The lawyer must put into perspective how contract terms will play out and much of this is derived from experience in completing actual transactions with Chinese companies rather than a theoretical approach.

One of the most significant aspects of an iron ore supply contract for delivery into China is that all iron ore imports are required to be inspected by China Inspection and Quarantine (“CIQ”) to confirm their weight, mineral composition and moisture content.  Results of this inspection which are used to calculate final pricing of a deal often times differs from inspections performed at the port of loading.  Consequently, this contract clause must be carefully negotiated to include a conflict resolution mechanism.  In addition, careful supervision by experienced personnel of the inspection process at all phases of the production and shipping process are essential to ensure the proper application of the agreed on pricing terms. For our transactions dealing with these issues, we have developed workable contract terms that are acceptable to all parties.  Also, we have experienced personnel stationed at each phase of production and the port of loading and the port of discharge in China to ensure that the expected economic results of each transaction are achieved.

We expect to ride the wave of the projected 7% annual growth in demand for iron ore in China using the experience of our worldwide, multi-cultural staff and tools we have developed to ensure success in completing supplies of iron ore to China.

 

Lazarus Rothstein

Executive Vice President and General Counsel

CD International Enterprises (NASDAQ: CDII)

431 Fairway Drive, Suite 200

Deerfield Beach, FL 33441

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