Till such time China pressed the accelerator hard on steel capacity development, iron ore remained an unsung commodity. But now for a combination of mostly wrong and also some right reasons, iron ore is hitting the headlines at regular frequency. Surging demand for the principal steelmaking ingredient has allowed the triumvirate of big miners to arm twist the buyers worldwide to agree to hefty price rises.
Not only have the Brazilian Vale and Anglo-Australian BHP Billiton been able to secure a 100 per cent increase in ore prices to $120 a tonne over last year’s annual contract rates but to the discomfort of steelmakers, expressed stridently by the ones in China, they could get a 40-year old yearly benchmark regime scuppered for three-monthly contracts. Unfortunately, the price revision of this order has coincided with the world economy showing some signs of revival after experiencing one of the history’s bitterest recessions.
Not surprising, therefore, that director general of Eurofer, the representative body of European steel industry, Gordon Moffat has described the ore cost rise as an “insult.” So cut up is Eurofer about the hostile ore pricing that in a representation to the European Commission seeking relief, it says of finding “strong indications of illicit coordination of price increases and pricing models and pressure on individual steel producers to accept these changes.”
The suspicion of pricing abuses gets reinforced by some Chinese steelmakers’ complaints that as negotiations for ore rates were on, the big miners took the unusual step of “cutting supplies.” As we have been seeing since last year ore price talks between China and suppliers are beset with major differences. In a surprising move, the World Steel Association representing over 90 per cent of global steel capacity is calling on authorities across the world to make a scrutiny of ore market.
European Commission did not lose any time to assure the complaining steelmakers that all “relevant information” would be considered to see if the charter of competition got compromised in the process of transition to the quarterly rates fixing and raising of ore prices by up to 100 per cent. However distraught China may be, its rate of GDP growth allows it to absorb better the incremental steel making cost following ore prices revision than most other countries, particularly the ones in Europe.
Vale, BHP and Rio Tinto have a three-quarter share of the global sea-borne iron ore trade. And if they betray monopolistic tendencies as China, which accounts for about 70 per cent of the $200-billion sea-borne market for the mineral, alleges then it calls for close scrutiny. A decade ago, the Chinese share was around 16 per cent. In any case, the Chinese complaints of the big three “monopolising supplies” are arguably less severe than the European automobile industry allegations of their having the “pricing power of an oligopoly.”
Normally demand and supply are the principal price determinants. But in an industry where there is a great degree of consolidation as in iron ore – the opposite is the case with steel where in spite of the work by ArcelorMittal, JFE of Japan and Tata Steel, capacity remains widely dispersed – price distortions happen if the few big constituents bring into play their “oligopolistic power.” What the regulators need to find out if the complaints have merits and if the answer is yes then initiate appropriate corrective measures.
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It has to be said that market distortions are unavoidable when spot prices command a premium of 90 per cent and more, as was the case prior to BHP striking the quarterly deal with Japanese steelmakers, over the year long term contract rates. While spot prices are certainly not the best way to capture the dynamics of demand and supply, the miners are justifiably irritated when contract prices fall way behind ready prices.
Miners will argue that in the quarterly price regime, contract prices will at all times approximate spot prices.
They have wrested hefty price rises amid protests arising particularly in Europe that if steel cost increase by up to a third is to be passed on to buyers of cars, consumer durables and houses then the economic turnaround could get stifled. India, though the world’s third largest exporter of ore, is a bystander since it does not have a role in price negotiations. Moreover, except for what goes from here to Japan and South Korea, our entire sales to China are on spot prices.
What BHP and Rio certainly did not bargain for is that the controversy over ore price fixing will reopen the debate as to the desirability of the $100-billion worth joint venture merging their iron ore mining operations in the Pilbara region of Western Australia. BHP and Rio have stopped sounding convincing that the JV will only combine the mines, infrastructure and workforce to effect savings of $10 billion and is not intended to give them extra marketing power.