india has signed 2006 long-term iron ore contract , page-2

that is very interesting and surprising, the key though is how RIO-BHP-CVRD play this....

I found this on the website of Roche Bay PLC:

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Hello List,

Let's play a game.

It is a simple game and there are only a few players: the iron ore producers and the ore buyers. The first move in the game: CVRD settles for a 23.5% price rise for fines with Arcelor. Then the Chinese cap the price of iron ore at a rollover price. What happens next?

After the Chinese cap the price of ore, BHP, Rio Tinto and maybe CVRD decide not to ship ore to China, which is a rational thing to do. When you cannot agree with the dealer to buy that new Rolls for 20,000 Pounds versus the 200,000 Pounds that he wants, the dealer rarely lets you walk off the lot with it no matter how nice you are.

If two out of the Big Three stop shipping ore to China then the Chinese are short at least 6-18 million tonnes of ore each month. They have 30 million tonnes in a stockpile, so they will last about 2-6 months, but the spot price of iron ore in China will go through the roof. The stocks are not all owned by steel companies and the traders will seek profit quickly and will drive the spot price up two-fold in less than a month. I like my Indian friends, but when your fallback plan is Indian traders, good luck.

Who caves first: the company that has $4-5 in fixed costs per tonne of lost capacity that it cannot offset, or the company with $70 in non-recoverable fixed costs per tonne of lost production? Will it be the company with a few thousand idle employees that will still get paid of course, or the country where hundreds of thousands of people will be out of work? The blustering the Chinese are doing is getting great press and some analysts are buying it, but the emperor has no clothes, and without iron ore he cannot make any more.

I am rooting for the steel companies in this fight since they are the underdogs. I want them to find a solution to their problems, but the purported solution of capping prices when there are only three major sellers is like being a homeowner and saying the price of electricity is too high and unless the electric company cuts the price you are going to get out those big bolt cutters you keep around the house for suicidal days and cut the electric line into the house.

Enough analogies. My only statement to the Chinese is come up with a better negotiating tool; and to the analysts who are covering the Big Three, go take a game theory course. If this is the best the Chinese can come up with, I do not see why the iron ore companies cannot ask for the sky in pricing. Until there are alternate suppliers the game is rigged and the house wins.

I have to get back to work, so until next time.

Cheers,

Benjamin

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hmmm