Have the Big Three Iron Ore Producers – Vale, Rio and BHP Been Too Successful For Their Own Good?

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Strange question to ask you may say but their recent success in increasing the benchmark iron ore price some 90% over last year’s level and simultaneously ditching the 40 year old annual price fixing in favor of a quarterly pricing mechanism seems to have angered steel makers and authorities the world over. For once the Chinese and Europeans have found something to agree about – they don’t like the dominance of the big three iron ore producers over the iron ore market. The three control something like 70% of all seaborne iron ore trade and set the price and largely the pricing terms that the remaining producers follow.

In an FT article, the China Ministry of Commerce is said to be looking at bringing action against the producers under Chinese anti monopoly laws. The Chinese are angered that even though they are the world’s largest iron ore consuming country and have four of the world’s top ten steel producers in their ranks they feel they have absolutely no bargaining power in their dealings with iron ore suppliers. Part of this is their own fault. The Chinese steel industry is notoriously fragmented with something like 300+ steel producers. The authorities try to consolidate purchasing by only allowing the largest consumers licenses to import but mid sized consumers find ways round it. In an economy that is growing so fast there is a natural tendency to secure supplies today regardless of price in the belief the market will rise tomorrow and you can still make a profit. Under such circumstances even China’s size does not give it the bargaining power it believes it is due.

Having said that Europe does not fare much better, even though the region is the second largest steel producer after China and its industry is very much more consolidated. It has been forced to accept the big three price increases and shift to quarterly pricing, prompting the industry representative organization Eurofer to push the EU for action to tackle “unfair competition and excessive pricing in the iron ore sector according to a Telegraph article. Playing to the politicians gallery, Eurofer is quoted as saying, “Iron ore is the basis for the EU’s most important value chain. If economic access to it is hampered through unjustifiable pricing and consequently steel production in Europe is jeopardized, this will have severe consequences,” Not that steel producers are above getting the most for their finished products if they find themselves in a bull market as consumers will recall from 2007/8 when steel prices (and producers profits) reached historic highs. Eurofer’s gripe is as much to do with the forced shift to quarterly pricing, which, they say, makes it very difficult to give annual contracts to major consumers like automotive. However it is all shaping up for a showdown between Chinese and European anti competition authorities on one side and the iron ore producers on the other, either as a series of country specific cases or possibly a more coordinated offensive as called for by the World Steel Association in another Telegraph article.

The iron ore producers response is to ignore allegations that they have unfair control of the market saying instead that they are plowing their profits into new mines to increase the available supply, not that availability appears to be the problem. The big three are not saying price rises are because they don’t have enough iron ore. This is not a supply and demand case where too many buyers are chasing too little supply. It’s more a case of too much demand is chasing after a limited number of suppliers. If one supplier names a high price and the other two follow in collusion or not the buyers have nowhere else to go. In that respect maybe the steel mills have a case. Ironically this action is coming just as the industry moves toward a more open market set pricing structure. With quarterly pricing fixing rather than annual allowing price movements that are more representative of the underlying conditions and the growing OTC iron swaps market creating the opportunity for hedging, the iron ore market could be said to be more open and transparent than it has ever been maybe that’s just the point. If supply is largely held in the hands of just three firms even quarterly pricing and a swaps market doesn’t create a fair market.

–Stuart Burns

Comment (1)

  1. Arlen Schmidt says:

    The Chinese have nobody to blame but themselves for the miners insistence that pricing contracts be re-negotiated on a quarterly basis. Who would want to supply Ore on fixed annual prices when the Chinese simply refuse to pay these Benchmarks once the Spot price begins to fall. CISA claims that the Spot market does not reflect supply/demand fundamentals in a rising market, yet they are all too willing to use this as justification to pay lower prices in a falling market. If China want to be taken seriously as a “market” economy then they need to start acting like one. They can start with acknowledging that liquid markets produce efficient prices and hedge their expsosure like everyblody else. There are no free options in our world, and China obviously still has a lot of growing up to do before it can claim to be a credible, transparent Market Economy.

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