China spits the iron ore dummy

ONE Australian resources analyst has gone so far as to say that China, emboldened following the Stern Hu case, now believes it can fly in the face of international convention and make up its own rules when it comes to iron ore price negotiations.
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MiningNews.Net

Minelife senior resource analyst Gavin Wendt’s comments follow calls by China’s Iron and Steel Association for its members to boycott iron ore sales contracts for two months from the world’s three largest producers, Rio Tinto, BHP Billiton and Vale.

According to Securities Times, quoting CISA secretary-general Shan Shanghua, the association held a meeting with China Chamber of Commerce for Metals and Chemicals Imports and Exports on Friday to discuss the regulation of the iron ore import market.

The call has reportedly not found favour, however, and steel mills seemed to have a divided front on the issue.

CISA’s statement came after BHP and Vale said they had signed short-term deals with their customers and abandoned the annual benchmark pricing system for iron ore.

BHP last week signed agreements with Asian steel mills for short-term deals based on market pricing and Vale SA, the world’s largest iron ore producer, agreed with 97% of its global clients to opt for quarterly price adjustments for ore shipments.

“The international community should have held the Chinese accountable when it came to the Stern Hu case and obviously they [the Chinese] think this sort of action works,” Wendt said.

“I don’t think they have any chance of succeeding, but their actions have effectively shot their members in the foot.

“It is childish behaviour and they are on the world stage and need to abide by the big boys’ rules.

“It is also another example of CISA’s obstinance when it comes to iron ore price negotiations and it is ludicrous to contemplate they would get any significant support for such a boycott, no matter how much you are against iron ore price increases.

“They would be better off locking in a price now or otherwise they could risk paying more in three months time.”

Stock Analysis senior resources analyst Peter Strachan echoed Wendt’s sentiment.

“They are just stamping their feet, which is really adolescent behaviour and shows that they are not mature players in the overall resources market and clearly don’t understand how free markets work,” Strachan said.

“The Chinese have just come out of 60 years of centralised markets and are finding it difficult to re-emerge into the global world trade activity, despite the fact they have joined the World Trade Organisation.

“Someone will tap them on the shoulder and tell them that throwing such tantrums does not win you any favours.”

However, if CISA does hold true on its threat, this could signal an opening for Korea and Japan to purchase iron ore at lower prices, due to the majors being forced to sell on the spot market.

China has 90 million tonnes of iron ore inventories it has been busy building up over the last nine months.

It currently purchases around 40Mt a month (450Mt per annum) from BHP, Rio Tinto and Vale, which it could offset not just from inventories but by reigniting domestic production that was shut down during the low-price environment.

Additionally, sales from independent players, South Africa and India could potentially contribute 10Mt a month.

“So they could effectively squeeze by through boycotting sales for two months but it is not really the smart way to treat your main supplier,” Strachan said.

“They need to play smarter.”