Iron ore wars get nasty: Higher ore prices--and more acquisitions by China--ahead

01/13/2010 9:23 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The war of words—and sometimes deeds—continues between China and the world’s biggest iron ore producers, BHP Billiton (BHP), Rio Tinto (RTP), Vale (VALE).

The producers seem intent on freezing China out of the annual negotiations that set iron ore prices for the year ahead. The companies are instead talking to Japanese steel makers in an effort to reach a benchmark deal that will then be presented to Chinese steel makers on a take it or leave it basis, according to the Financial Times.

China is the world’s largest iron ore importer, accounting for 50% of the world’s seaborne iron ore market.

But China’s steel industry, led by the government owned giant Baosteel, has been hamstrung by internal disagreements about how to negotiate and what price target to aim for.

Australian producers aren’t in a mood to talk after the detention last year of Stern Hu, Rio Tinto’s former iron ore executive in China and three other employees. Recently Hu’s case has been referred to Chinese prosecutors who have 45 days to decide whether to bring him to trial.

I think this quote from an Australian iron ore executive pretty much sums up the attitude at producers this year: “As far as I am concerned, they [the Chinese] could come over to Australia if they want to talk.”

The likely result?

China wouldn’t have to accept any deal negotiated by the Japanese or other Asian steelmakers as the basis for an annual contract. Instead Chinese steel companies could buy iron ore on the spot market.

But that would be very expensive. The current spot price is about $129 a metric ton. That’s about 50% higher than the negotiated annual price for 2009. Goldman Sachs recently projected a negotiated price of $69.60 for 2010.

That may be low. The China Iron and Steel Association, China’s representative in any annual talks, recently said it expected iron ore producers to look for a 20% to 30% increase in 2010.

In addition iron ore has been tough to find on the spot market in the last two months, Chinese steel industry officials say, as iron ore producers have reduced supply to strengthen their hand during negotiations. China has set a target to increase steel production by almost 9% this year in response to increased demand for steel created by the country’s economic stimulus package

The long-term effect of this war, of course, will be to reinforce Chinese fears about a conspiracy to stunt the country’s economic development by cutting access to critical raw materials. If I were in power in Beijing, the iron ore wars would certain have me ordering China’s companies to be even more active in buying overseas sources of raw materials.

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