iron ore price

Iron Ore: Chinese handshakes or fisticuffs?
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Tuesday, 11 September 2007


IT WAS all smiles last week as China signed up for multibillion dollar resources deals in Perth and Sydney. But the friendly handshakes may soon turn into fisticuffs as hostilities resume in the annual iron ore price talks.The Metal Detective, by Stephen Bell.

Price is at the heart of China's latest splurge on Australian resources.

Alongside PetroChina's high profile gas deals at Gorgon (with Shell) and Browse (Woodside), five Chinese companies are backing Yilgarn Infrastructure's proposed $3 billion port and rail network to service the Mid-West iron ore mines in Western Australia .

In terms of gas, China has signalled it is willing to pay realistic prices, after pulling out of the market a couple of years ago when the Chevron-led Gorgon venture played hardball.

Presumably the Chinese don't see gas prices getting cheaper in the years ahead.

China is also working to ease the pain of iron ore prices, which have nearly doubled in the past three years.

It is looking to dominate infrastructure in the emerging Mid-West, backing the Yilgarn deal against Mitsubishi's Murchison Metals plan. (Both proposals rest on the WA Government finally showing some leadership in the Mid-West by approving the long-delayed Oakajee port development north of Geraldton).

China is also investing directly in iron ore, most notably in the form of Ansteel's backing of George Jones' Gindalbie Metals and Sinosteel's partnership with Midwest Corp.

Both of those Chinese steel companies are part of the Yilgarn infrastructure deal. And China is itching to get the first ore from Andrew Forrest's $3 billion-plus Pilbara venture (due by March next year).

All of this activity shows how keen China is to get its hands on more ore outside of the Rio Tinto-BHP Billiton "duopoly" in Australia.

Iron ore is in short supply and prices are headed higher – much higher judged by what is happening in the spot market.

At the moment, analysts are tipping a 25% hike in contract prices in the year starting April 1, 2008, compared with a 9.5% jump this year. But their forecasts could prove to be way too conservative.

Macquarie Bank notes that Indian sellers last week were offering iron ore for as much as US$125 (before freight costs), more than double the price of 6-8 months ago.

"This suggests that Chinese steel mills could soon be paying as much as $160 per tonne cif (the price including freight) for Indian ore, compared with only $75 per tonne in January," Macquarie said.

The bank said that enormous price rises are possible in next year's iron ore price negotiations (well above our current forecast of a 25% price rise).

Apparently Chinese buyers have already conceded contract prices will go up, though their tip of a 10% hike looks hopelessly optimistic at this early stage.

The preliminary shadow boxing (between Rio, BHP and Brazil's CVRD in one corner, and Chinese steel mills in the other) has already begun. But the real slugfest doesn't normally get going until November.

One industry source told the Metal Detective that Australian suppliers are determined to play hardball this year on freight rates.

Contractual Australian ore is by far the cheapest for China because of the freight savings it enjoys compared with Brazil.

BHP famously pushed for price recognition of this freight "differential" a couple of years ago, but was stared down by the incensed Chinese.

Now, apparently, freight is back on the table, a tactic predicted to provoke predictable outrage among the Chinese.

China is "threatening World War 3" if the Australians persist with the freight angle, the source said.

The Australians are in no mood to be generous. They are still fuming about last year's "sweetheart" deal between China and CVRD, with the latter pinching market share by agreeing to a fairly puny 9.5% price rise.

This time round the Australians seem determined to rock the boat in their favour. And with the spot market going through the roof, they are well placed to do so.

A headline-grabbing iron ore price hike would be a nice tonic for BHP and Rio as they grapple with volatile base metals, still jittery from the worries about a United States recession.

Higher prices should also prove timely for emerging companies such as Fortescue, Mt Gibson, Murchison and Michael Kiernan's Territory Resources.

Kiernan has bowed out of the Consolidated Minerals takeover (or should that be soap opera?) to focus on iron ore, namely Territory's new Frances Creek mine in the Northern Territory.

MD understands Territory will ship its first ore from Darwin later this month – a good bit of timing as the price talk speculation heats up.

Apparently the energetic Kiernan is also keen to build a 10-15 million tonnes per annum iron ore producer from Territory, largely by merger and acquisition activity.

He has previously flagged a close interest in the emerging magnetite sector in WA.

But the Big K (backed by Noble Group) had better move quickly if he is serious about playing a leading role in consolidation activity. After all, Kiernan is competing against hungry steel mills from China, Japan and Russia in the great Australian iron ore race.