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BEIJING ( Caixin Online ) — The world’s largest iron ore supplier, Vale SA, signed an agreement on April 17 to join a newly launched spot trading platform for iron ore in China.
Following Fortescue Metals Group AU:FMG +1.27% FSUMF +1.00% and Rio Tinto AU:RIO +0.11% RIO +1.32% , the Brazilian mining giant is the third international miner to become a founding member of the platform. Promoters say it will give China’s steel makers more control over the prices they pay for iron ore, particularly the huge quantities shipped from Australian and Brazilian mines.
Testing began March 29 for the first-of-its-kind platform. After it is fully launched in May, according to its operator Beijing International Mining Exchange, the annual transaction volumes are expected to grow to 100 million tons, covering about 20% of all iron ore imported from spot markets by China. BIME Vice President Liang Ruodong has frequently called this tonnage level “ideal.”
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China last year imported some 686 million tons of iron ore, according to Liang. About 72% of that amount was bought by the nation’s state-run, foreign-domestic joint venture and private mills through global and domestic spot markets.
China produces and consumes more of this multipurpose metal than any other country, but the nation’s steel makers have long cried foul over pricing systems they say favor the big mining companies that control most of the planet’s ore supplies.
The world’s largest and second-largest miners, BHP Billiton BHP +1.42% AU:BHP +1.23% and Rio Tinto, bowed to the complaints a few years ago by introducing spot pricing and abandoning a system of closed-door price negotiations. The negotiating system had consistently strained the miners’ relations with steel makers, sometimes irking the Chinese government.
Most deals in 2010 and last year were priced according to a spot index set by the commodities data provider Platts. The Platts index was replaced last fall by the China Iron Ore Price Index (CIOPI), compiled by the steel makers’ main trade group, the China Iron and Steel Association (CISA).
Mining companies have supported using these spot pricing systems. In addition, BHP Billiton formed its own, Singapore-based spot price mechanism.
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But even after CIOPI’s start-up, Chinese steel makers continued to claim their ore costs were too high. They said prices should fall further to levels consistent with their huge share of global ore demand.
CISA crystallized this criticism by arguing that spot pricing systems are too opaque and can be easily manipulated by mining companies. The trade group was even dissatisfied with its CIOPI system.
Nervous start
The new spot trading platform, however, has been touted as a way to finally level the playing field and give steel makers a stronger voice.
The platform’s sponsors — CISA, BIME and the China Minmetals Chemicals Import and Export Chamber of Commerce — formally unveiled the platform in January. They signed up 26 founding members, including 13 steel makers such as Baosteel CN:600019 +0.21% , Shougang and Hebei Iron and Steel CN:000709 -0.32% , and trading companies including China Minmetals, Sinosteel and Sinochem International.
Many of China’s smaller steel makers are expected to join the platform later.
None of the international mining companies were on the initial membership list, leading to fears in some corners of the Chinese steel industry that the platform might flop.
Those fears vanished March 20, however, when the world’s fourth-largest iron ore producer by capacity, Fortescue Metals Group (FMG), signed a contract with BIME to join the platform.
A few days later, Rio Tinto came aboard, followed by the world’s No. 3 iron ore supplier, Vale SA VALE -0.22% of Brazil.
“Vale supports China’s iron ore sot trading platform,” a BIME statement declared.
A BIME source told Caixin that another major company would likely join soon, thus hinting that a deal with BHP Billiton was in the works.
A stronger hint came from BHP Billiton China President Clinton Dines, who told Caixin that international mining groups such as his have long cooperated with trading platforms. He also said platforms can do a good job reflecting market supply and demand, which in his opinion is the reason why China’s steel makers have had to pay a lot for ore.
“China wants to launch a new platform because they think iron ore prices are currently high and they have never had a voice. But in the past decade, the reason for high iron ore prices is not that China has no say, but strong demand and supply shortages,” said Dines.
Indeed, if every major ore supplier gets on board, the Chinese platform could affect global pricing in ways that satisfy domestic steel mills. The platform’s mining company members will be allowed to sell as little or as much as they want through the scheme.
The mining companies see profit potential as well. Several sources said FMG, for example, hopes to use the platform as a springboard for market expansion in China.
Antony Priddy, FMG senior marketing manager, recently said the company plans to increase production capacity to 155 million tons next year from the current 55 million. Based on FMG’s 2011 business, which saw Chinese buyers account for 96% of all operating revenues, most of this new output would be shipped to China.
Meanwhile, Vale China President Luiz Meriz recently said his company is now operating mines at full capacity and would continue to do so. He also pledged more capital investments with better yields.
Also expanding is BHP Billiton, which has plans to increase production by 2020 to 450 million tons of ore from 178 million tons last year. Rio Tinto aims to extract 400 million tons in 2020 compared to 231 million tons last year.
Changing market
Iron ore prices paid by Chinese mills are expected to fall gradually for some time, several sources said.
One reason is that steel output growth is slowing in China. Last year’s national crude steel production was 683 million tons, up 8.9% from 2010 compared to 9.3% growth between 2009 and 2010.
In October, the import price of iron ore fell to $117 per ton.
Also supporting the predictions of weaker iron ore prices is the fact that about 100 million tons of imported ore has been stockpiled at Chinese ports. Much of this inventory is owned by trading companies.
FMG Chairman Andrew Forrest recently said iron ore prices will eventually decline to levels that Chinese steel companies want.
Consulting companies including McKinsey & Company Inc. have predicted an oversupply of iron ore in China by as early as next year. That would force mining groups to seek more sales channels and actively participate in the new platforms.
“If international mining groups don’t participate in China’s trading platform, they may be at a disadvantage in the future,” said Sheng Zhicheng, general manager of industry information portal 96369.net.
“Steel makers want to buy (ore) cheaply and conveniently. Traders want to buy cheaply and sell expensively. Mining groups have always wanted simply to sell high,” Sheng said. “The most difficult problem is about how to take all parties into account and distribute benefits rationally.”
Sheng said trading rules released by BIME include “price fluctuation limits” as well as contract-trading principles. “Whether this is a pure spot exchange or not will be determined after seeing the final results,” he said.
BEIJING ( Caixin Online ) — The world’s largest iron ore supplier, Vale SA, signed an agreement on April 17 to join a newly launched spot trading platform for iron ore in China.
Following Fortescue Metals Group AU:FMG +1.27% FSUMF +1.00% and Rio Tinto AU:RIO +0.11% RIO +1.32% , the Brazilian mining giant is the third international miner to become a founding member of the platform. Promoters say it will give China’s steel makers more control over the prices they pay for iron ore, particularly the huge quantities shipped from Australian and Brazilian mines.
Testing began March 29 for the first-of-its-kind platform. After it is fully launched in May, according to its operator Beijing International Mining Exchange, the annual transaction volumes are expected to grow to 100 million tons, covering about 20% of all iron ore imported from spot markets by China. BIME Vice President Liang Ruodong has frequently called this tonnage level “ideal.”
ABOUT CAIXIN
Caixin is a Beijing-based media group dedicated to providing high-quality and authoritative financial and business news and information through periodicals, online and TV/video programs.
• Get the Caixin e-newsletter
China last year imported some 686 million tons of iron ore, according to Liang. About 72% of that amount was bought by the nation’s state-run, foreign-domestic joint venture and private mills through global and domestic spot markets.
China produces and consumes more of this multipurpose metal than any other country, but the nation’s steel makers have long cried foul over pricing systems they say favor the big mining companies that control most of the planet’s ore supplies.
The world’s largest and second-largest miners, BHP Billiton BHP +1.42% AU:BHP +1.23% and Rio Tinto, bowed to the complaints a few years ago by introducing spot pricing and abandoning a system of closed-door price negotiations. The negotiating system had consistently strained the miners’ relations with steel makers, sometimes irking the Chinese government.
Most deals in 2010 and last year were priced according to a spot index set by the commodities data provider Platts. The Platts index was replaced last fall by the China Iron Ore Price Index (CIOPI), compiled by the steel makers’ main trade group, the China Iron and Steel Association (CISA).
Mining companies have supported using these spot pricing systems. In addition, BHP Billiton formed its own, Singapore-based spot price mechanism.
Click to Play
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Robert Downey Jr. and Gwyneth Paltrow, two of Hollywood's A-List, are teaming up to film "Iron Man 3" in China, but the match doesn't come without strings attached.
But even after CIOPI’s start-up, Chinese steel makers continued to claim their ore costs were too high. They said prices should fall further to levels consistent with their huge share of global ore demand.
CISA crystallized this criticism by arguing that spot pricing systems are too opaque and can be easily manipulated by mining companies. The trade group was even dissatisfied with its CIOPI system.
Nervous start
The new spot trading platform, however, has been touted as a way to finally level the playing field and give steel makers a stronger voice.
The platform’s sponsors — CISA, BIME and the China Minmetals Chemicals Import and Export Chamber of Commerce — formally unveiled the platform in January. They signed up 26 founding members, including 13 steel makers such as Baosteel CN:600019 +0.21% , Shougang and Hebei Iron and Steel CN:000709 -0.32% , and trading companies including China Minmetals, Sinosteel and Sinochem International.
Many of China’s smaller steel makers are expected to join the platform later.
None of the international mining companies were on the initial membership list, leading to fears in some corners of the Chinese steel industry that the platform might flop.
Those fears vanished March 20, however, when the world’s fourth-largest iron ore producer by capacity, Fortescue Metals Group (FMG), signed a contract with BIME to join the platform.
A few days later, Rio Tinto came aboard, followed by the world’s No. 3 iron ore supplier, Vale SA VALE -0.22% of Brazil.
“Vale supports China’s iron ore sot trading platform,” a BIME statement declared.
A BIME source told Caixin that another major company would likely join soon, thus hinting that a deal with BHP Billiton was in the works.
A stronger hint came from BHP Billiton China President Clinton Dines, who told Caixin that international mining groups such as his have long cooperated with trading platforms. He also said platforms can do a good job reflecting market supply and demand, which in his opinion is the reason why China’s steel makers have had to pay a lot for ore.
“China wants to launch a new platform because they think iron ore prices are currently high and they have never had a voice. But in the past decade, the reason for high iron ore prices is not that China has no say, but strong demand and supply shortages,” said Dines.
Indeed, if every major ore supplier gets on board, the Chinese platform could affect global pricing in ways that satisfy domestic steel mills. The platform’s mining company members will be allowed to sell as little or as much as they want through the scheme.
The mining companies see profit potential as well. Several sources said FMG, for example, hopes to use the platform as a springboard for market expansion in China.
Antony Priddy, FMG senior marketing manager, recently said the company plans to increase production capacity to 155 million tons next year from the current 55 million. Based on FMG’s 2011 business, which saw Chinese buyers account for 96% of all operating revenues, most of this new output would be shipped to China.
Meanwhile, Vale China President Luiz Meriz recently said his company is now operating mines at full capacity and would continue to do so. He also pledged more capital investments with better yields.
Also expanding is BHP Billiton, which has plans to increase production by 2020 to 450 million tons of ore from 178 million tons last year. Rio Tinto aims to extract 400 million tons in 2020 compared to 231 million tons last year.
Changing market
Iron ore prices paid by Chinese mills are expected to fall gradually for some time, several sources said.
One reason is that steel output growth is slowing in China. Last year’s national crude steel production was 683 million tons, up 8.9% from 2010 compared to 9.3% growth between 2009 and 2010.
In October, the import price of iron ore fell to $117 per ton.
Also supporting the predictions of weaker iron ore prices is the fact that about 100 million tons of imported ore has been stockpiled at Chinese ports. Much of this inventory is owned by trading companies.
FMG Chairman Andrew Forrest recently said iron ore prices will eventually decline to levels that Chinese steel companies want.
Consulting companies including McKinsey & Company Inc. have predicted an oversupply of iron ore in China by as early as next year. That would force mining groups to seek more sales channels and actively participate in the new platforms.
“If international mining groups don’t participate in China’s trading platform, they may be at a disadvantage in the future,” said Sheng Zhicheng, general manager of industry information portal 96369.net.
“Steel makers want to buy (ore) cheaply and conveniently. Traders want to buy cheaply and sell expensively. Mining groups have always wanted simply to sell high,” Sheng said. “The most difficult problem is about how to take all parties into account and distribute benefits rationally.”
Sheng said trading rules released by BIME include “price fluctuation limits” as well as contract-trading principles. “Whether this is a pure spot exchange or not will be determined after seeing the final results,” he said.
