Chinese Iron Ore Boycott Unsustainable

By Dave Brown – Exclusive to Iron Investing News

Iron ore prices have more than doubled over the last six months, which leaves the mining producers operating at depressed price levels that were set at now irrelevant marks. Steel manufacturers suggest that end-product demand has yet to pick up, and that higher pricing premiums are unsustainable.

In an environment where demand is lacking, any hypothetical price increases could serve as a performance drag to an already fragile economic recovery and the survival of weak industry participants would be uncertain.

Price Setting

Three major miners, Vale S.A. (NYSE:VALE), BHP Billiton Ltd. (NYSE:BHP) and Rio Tinto (LON:RIO), control about 66 percent of global iron ore trading. The major multi-national mining producers have used their market dominance to impose a new quarterly pricing mechanism that replaces the traditional benchmark system. The producers have reached agreements with most of the major steel mills in Asia, with the significant exception of China.

The China Iron & Steel Association (CISA) has responded to the new pricing regime by calling on Chinese steel producers to boycott the three largest iron ore producers. China Iron & Steel Association is a national, non-profit organization founded in 1999 that professes to represent the needs of China’s steel and iron industry. The CISA developed an unfavourable reputation among many Chinese steel producers after spoiling last year’s price agreement and demanding a 45 percent discount over the previous year’s prices. The subsequent failure of negotiations left China without an agreement for the year’s benchmark prices and eventually major Chinese steel producers were forced to break rank and individually sign contacts with foreign suppliers based on the Japanese benchmark price of about $63 per metric tonne.

Iron ore demand is increasing among Chinese steel makers and the CISA lead boycott is simply not credible. Iron mining companies recognize this and will not relent from their position, which grows stronger every day that global demand recovers and ore prices rise.  Despite its importance as the key global importer, China is losing clout in the iron ore market.