Good luck with that--now some Chinese importers want a boycott to protest Vale, Rio Tinto, and Billiton's iron ore monopoly

04/07/2010 12:30 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Now this seems like a bad idea.

Some of China’s iron ore traders are suspending imports of ore from Vale (VALE), Rio Tinto (RTP), and BHP Billiton (BHP), the three companies that dominate the world’s iron ore production. The decision to stop importing ore, China’s National Business Daily reported today, April 7, comes after a request from the China Iron and Steel Association to weaken the major iron ore suppliers' monopoly on the market.

About 110 Chinese companies import iron ore—70 of them are steel mills—and it’s not clear at the moment how many companies have decided to stop importing ore or whether any major importers have signed on. The request from the China Iron and Steel Association to boycott Vale, Rio Tinto, and BHP Billiton hasn’t received support from the county’s big steel makers.

It’s not hard to understand why.

China is the world’s largest steel producer. It has successfully won market share from extremely efficient competitors in Korea, India, Europe, and the United States. Many of those competitors have excess production capacity at the moment. The U.S. steel industry is running at about 70% of capacity, for example. And you’d like to reduce iron ore imports and cut into Chinese steel production so that competitors can recover some of the ground that they’ve lost?

Estimates say that China currently has enough iron ore stockpiled to meet demands from steelmakers for about two months.

The call for a boycott comes as Chinese ore importers and steel makers try to push back against recent contracts that have seen iron ore prices climb by 80% to 100%. That price increase is a reflection of a move away from annual fixed price contracts to quarterly deals that reflect current spot prices for iron ore. Hardball Chinese “negotiating” tactics—including handing out 14-year prison terms to Rio Tinto employees on charges of bribery and spying—have helped kill the old system.

I can understand why China’s iron and steel industry would want to put that genii back in the bottle, but it just isn’t going to happen.

Vale, Rio Tinto, and BHP Billiton understand who has the real power in this market.

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