Chinese punt on price
Friday, 30 May 2008
CHINESE steel mills are taking advantage of relatively low iron ore contract prices to speculate on the lucrative spot market - in a move that effectively siphons off profits from Australian miners. The news comes as BHP Billiton and Rio Tinto remain locked in an increasingly bitter battle with their most important customers in this year's iron ore contract price negotiations. A Chinese steel mill official said this week that speculative investors were piling into the spot market as a bet on future price increases - sending the dollar value of iron ore sky-high.
"The key reason behind the high spot prices is that some big mills are making use of the long-term iron ore agreements to dabble in speculation themselves," he said. "The government or the China Iron and Steel Association should do something about their activities."
The benchmark system, which has operated for about 40 years, requires BHP and Rio to accept contract prices set by the world's biggest iron ore producer, Brazil-based Vale, and a leading steelmaker such as China's Baosteel or Japan's Nippon.
But the Anglo-Australian mining giants have become increasingly frustrated with being price-takers because of the widening gap between contract and spot market prices for the steel-making ingredient.
Iron ore is trading at around $US200 a tonne on the spot market - much higher than the $US120 that Australian miners are set to receive under the 65 per cent increase agreed between Vale and Baosteel in this year's contract price negotiations.
For this reason, BHP and Rio are pushing for their iron ore contracts with Chinese steel mills to reflect the cheaper cost of shipping the raw material from Australia compared with Brazil.
China Inc has so far resisted paying a freight premium to Australian miners, even threatening to boycott Rio iron ore sold on the spot market.
However, BHP's separate campaign to dismantle benchmark pricing appears to be making progress, with Metals Bulletin and Platts planning to start competing indices for iron ore sold into China.
The official made the comments to industry journal Steel Business Briefing.
BHP shares fell $1.60 to $45.10 and Rio shares dropped $5.05 to $141.95.
Source: Herald Sun
