Friday, September 25, 2009

Chinese Blink on 2009 Iron Ore Pricing

It is good to be an oligarch - whether it be in US telecom, US finance, any industry in Russia, global mining ... you name it, you dominate. To the point you can even stare the Chinese down... I mean if you control the majority of the world's metals, where else are they going to go to shop? [Jul 11, 2009: NYT - China, Australia: Where Iron is Bigger than Gold & Oil] And this is why China is going around the world, using dollars funneled from US shoppers to snap up as many long lived commodity assets as they can.

  • Quietly accepting defeat, China's biggest steelmakers have largely given up trying to wring discounts on iron-ore purchases this year and are now concentrating on next year's contract-price talks, said people familiar with the secretive negotiations.
  • China, by far the biggest user of imported iron ore, has tried for months to leverage its size and growing influence to muscle miners Rio Tinto (RTP) BHP Billiton Ltd. (BHP) and Brazil's Vale SA (VALE) into lowering their prices for iron ore, used as the chief ingredient in the production of steel.
  • Though China produces more steel than any other country, it doesn't have enough natural iron ore and needs to import it from Australia, Brazil and India. The mining companies sell the iron ore, and each year the two sides hammer out a contract for prices and quantities.
  • But the world's strengthening economy and China's increasing demand for steel under its economic stimulus program has worked against the push for lower-priced iron ore.
  • Generally iron-ore contract prices run from April to April each year. But negotiations, which are often contentious, begin months in advance in order to fix a deal close to April. The failed efforts by the Chinese to drive down the cost of producing steel could ultimately affect the prices of steel-intensive products such as refrigerators, equipment and automobiles.
  • Chinese steelmakers and the world's miners have been operating under what is essentially a gentlemen's agreement in which both sides have agreed to settle for a 33% price cut from last year's prices. This is roughly the same price that miners negotiated with Japanese steelmakers earlier this year.
  • Chinese steelmakers rejected the agreement with the Japanese as not steep enough, in light of the weak demand and sluggish world economy earlier this year. They wanted a closer to 50% drop in iron-ore prices.
  • Chinese steelmakers were undone these past few months by their own members. Many of China's steelmakers, especially the midsize companies, secretly bought iron ore at lower contract prices and resold that same iron ore at higher spot market prices. For them, there was a financial incentive to keep spot prices higher.
[Jul 20, 2009: WSJ - Industry Pushes New Iron Ore Pricing Plan: Quarterly Rather than Annual]
[May 13, 2009: Commodities - It's China's World: We Just Live in It]
[Aug 30, 2008: WSJ - Steelmakers Develop New Iron Recipes]
[Sep 27, 2007: Shortages Here, Shortages There - Iron Ore is the Shortage of the Day]

Long BHP Billiton in fund; no personal position

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