As the Rio Tinto trial kicks off in Shanghai, there’s still little sign of agreement between China and the big mining companies on the annual iron ore contract price.
Indeed, as Michelle Applebaum at Steel Market Intelligence points out, the annual benchmark price has now evolved into a quarterly spot price, which is up around 90% to 100% on last year’s prices.
The deadline for this year’s negotiations is April, and the Chinese ministry of Commerce has now decided to wade into the fray, promising to "take moves to support Chinese steel mills, including adopting necessary trade measures".
Say what? The government is threatening unspecified trade measures against the iron ore importers? This doesn’t seem to make any sense. Who is China going to punish with these unspecified "trade measures"? Or does the ministry mean that it will cut import duty on iron ore in order to help win a better price?
At any rate, the mining companies are unlikely to be cowed by the (further) intervention of the government. In 2005, Vale’s chief negotiator pointed out: "The colonial period, when some nations defined the prices at which other nations had to sell their products, is over; price increases are not a matter of speech nor weapons; but a market issue".
Indeed, the more that the Chinese government tries to bully, the more you can generally be sure that it is in a weak position. Despite being the largest market for iron ore in the world, Beijing really doesn’t have much leverage.
Rio Tinto, BHP Billiton and Vale are just about the only companies that are capable of supplying China with the iron ore it requires and they are operating in a cartel.
In these circumstances, the more iron ore that China needs, the higher a price it is likely to have to pay. No matter if it locks up the executives of these companies or not.
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