Posted on 06/22/2008 9:32:34 PM PDT by bruinbirdman
Rio Tinto and BHP Billiton have asked their Chinese steelmaker customers to accept the largest ever increase in iron ore prices or risk the interruption of supplies from Australia.
Traders and industry officials said the mining companies have demanded price increases for their annual iron ore contracts in excess of the record 71.5 per cent rise of 2005 and were fighting for increases of 85-95 per cent.
Rio and BHP have warned their Chinese clients some annual contracts will expire next Monday and they would cease supply under the old terms. They have told them the ore would instead be sold into the spot market, where prices are higher.
The bold step indicates that the heated annual price negotiations, already well beyond their traditional conclusion date, are set to move into a hostile phase.
Analysts said most of Rio’s iron ore contracts would expire on June 30. However, some BHP contracts do not expire until September, leaving the latter time to negotiate and allowing Rio to take the lead in the discussions.
Macquarie, the Australian bank, said Rio was committed to securing a price in excess of the 85-95 per cent the market is expecting. “That stance suggests investors should be prepared for an extended and potentially hostile conclusion to the negotiations,” it said in a report.
Rio and BHP are demanding a larger price increase than Brazil’s Vale because their proximity to China reduces shipping costs.
Traders said that freight costs from Australia to China collapsed last week by 37 per cent as at least one of the mining companies stopped booking some vessels for July to ship under the old contracts. That move signalled their intention to move shipments into the spot market if the negotiations failed.
If Rio and BHP carry out their threat of diverting shipments into the spot market, analysts said the steelmakers would be likely to retaliate by stopping buying for as long as possible. Although China has record high iron ore inventories, the country depended heavily on imports, they said, and it would not be long before it had to cave in and buy into the spot market.
Morgan Stanley said in a report the ore market was under “unprecedented” pricing developments and . . . “remains very tight and in significant deficit”.
Rio and BHP declined to comment.
Ping
Ping
I guess cartels like OPEC exist in many businesses.
This is a big deal in China - they can’t stand being held hostage like this. Welcome to the real world!
In the long-term, this is a big problem, though. Their resource-heavy industry cannot be changed overnight. Days of churning out cheap products banking on commodity price staying low is over.
While someone is pissed over ore, another is happy in exports.
I am amazed that in all of China there are no iron ore deposits worthy of note.
I just read over a September 2007 Kiplinger article titled New Threat from China: Shoddy Steel Imports. The author, an associate editor, points out Kiplinger's impartiality in the comments section following the article.
Among other tidbits, the article stated that "The biggest concern is hollow structural sections widely used in construction" and "Chinese high-strength steel tubes and pipes are also a potential problem." It also mentioned that China is the second-largest supplier of high-strength steel to the U.S., after Canada.
Many have predicted dire problems for Red China "after the Olympics." More to come for the Commies?
And they just raised petrol prices.
yitbos
China’s trade surplus, if there is such a thing, will be going way down.
Chinese drill pipe sucks, holes aplenty and twists-offs too.
The low price is lost when you are always tripping to change out pipe.
I wonder what they would pay for Detroit.
Then we can plot the trend curve and say that China' GDP would surpass country X's by year 2xxx.
This is not likely to happen. We are all heading for really tough economic times, which China also made its share of contribution to, by consuming huge amount of commodities, and jacking up their price.
China should be tested on how well it can survive tough time. Then we can make better prediction on future growth potential of China. So far we have seen its performance under really favorable condition and gave it too much credit than it may deserve.
Tough economic times now would be a political disaster, and lead to widespread social unrest, which is what the central government is desperately trying to avoid.
Yep, son who is directional driller says brand new stanless steel Chinese drill collars will not even pass magnaflux and x ray. Their company wide rule, and I think all over west Texas, is no Chinese crap downhole.
He just spent 1.2 million for 60 of them from Germany, which all passed inspection with flying colors, and still had to have pins and boxes turned on them at a local machine shop.
The Asian meltdown of 1997 hurt them much more severly than us. The social ramifications were at least as significant.
The west can live with $140 oil. The Chi Coms can't.
They don't sell us much we really need. They need commodities.
This plus the other internal problems in China will make for some interesting times ahead.
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