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iron ore-full price dilemma for chinese http://www.miningnews.net/premiumarea.asp

Iron ore-full price dilemma for Chinese

Stephen Bell
Wednesday, April 19, 2006

AS THE annual mating season for iron ore prices nears consummation, the Metal Detective can't help reflecting on what a bizarre, topsy-turvy few months it has been.


After flexing its muscles in 2005, there is no doubt that China is leading the price charge this year, having recently overtaken Japan as the world's biggest iron ore importer.

The problem for Australia's two giant iron ore shippers – BHP Billiton and Rio Tinto – is they are unsure whether the blokes they are talking to in Beijing and Shanghai are the right ones.

Despite recent consolidation moves, China's steel sector is highly fragmented, much more so than in Japan.

Baosteel, China's biggest steel maker, is meant to be leading the current talks on behalf of all the other mills. But the miners wonder whether Baosteel is, in fact, just a mouthpiece for its majority shareholder, the Chinese Government.

The latter has been vocal in its opposition to the alleged price gouging by the Big Three: BHPB, Rio Tinto and Brazil's CVRD.

The involvement of the Chinese authorities has given the talks a highly-charged political nature.

After all, there are billions of dollars at stake. The Australian Bureau of Resource Economics, for instance, predicts that the value of Aussie iron ore exports will rise 26% to $A18 billion in 2006-07.

The forecast assumes a 12% price jump this year, which is probably not a bad guess based on the latest utterings from China and the producers.

Still fuming at last year's 71.5% hike, the Chinese initially refused to countenance any price increase this year.

Then there was a lot of noise about attempts by certain mills to "cap" the prices of iron ore imports. That threat was just silly and Chinese leaders have now accepted that the market will decide the price.

Yet China's idea of the market may be at odds with Australian or Brazilian ideas. The line between corporate and government entities remains blurred in China, where bureaucrats are also motivated by the need to retain "face" in their business dealings.

Should prices rise by anywhere near the 24% called for by CVRD, China would lose a massive amount of face.

China would also be left red-faced if Japan decides to jump in to settle the price due to Chinese dithering. After all, the Japanese did just that in liquefied natural gas recently after China refused to pay market prices for the gas from Chevron's Gorgon venture offshore Western Australia.

The 2006 iron ore year started April 1, so the clock is ticking loudly. But MD can remember times when the talks have run into late May, so China may stall for a few more weeks yet.

Earlier this month, there were reports in China that a rise of 10% had been agreed to, though that has since been denied by Baosteel.
The latest theory in Australian broking circles is that China wants to cap the price rise this year at only 10%, and is prepared to offer another 10% hike next year if the producers fall into line.

But MD is unsure whether the miners will agree to that scenario when analysts say a 15% jump is easily justified by current supply-demand trends.

Looking on with interest at this high-stakes poker game are dozens of junior WA iron ore hopefuls.

Companies including Grange Resources, Aztec Resources, Gindalbie Metals, Cape Lambert Iron, Mt Gibson Iron and Midwest have proposed major new export ventures.

The higher iron ore prices go, the easier it will be to finance these various developments.

The Big Daddy of the juniors, of course, is Fortescue Metals Group, run by the effervescent Andrew "Twiggy" Forrest.

Despite his spat with the corporate regulator, ASIC, over the veracity of statements made in 2004 about Chinese construction deals, Twiggy is running full steam ahead with his $2.5 billion Pilbara project due to begin production in 2008.

Last week, FMG estimated it could generate around $1.3 billion a year in earnings before interest, taxes, depreciation and amortisation, based on Snowden's recent feasibility study.

Twiggy is certainly excited about those numbers as he embarks on a fund-raising drive managed by Citigroup.

In an internal "pep talk" email to employees, he exclaims that the Pilbara venture is the "strongest proven large scale project I have ever witnessed. Anywhere".

"The capex funding challenge is low while the volume and quality of earnings is very high," Twiggy gushes, while thanking his employees for "putting your personal shoulder to the wheel again".

The good news for Twiggy, along with all the other hopefuls, is that iron ore prices look like staying high for quite some time.

Last week, broker Credit Suisse said it expects iron ore supply to be at its tightest in 2007, providing miners with a "very sound case" for another price hike in that year.

"We expect suppliers will be able to secure 5% increases in both 2007 and in 2008," the broker said.

Such statements are music to Twiggy's ears. But they carry a discordant ring for China as it tries to limit the cost of its rampant industrial growth.

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