More from The Australian. They're calling it a "negotiating tactic".
China to cap price on iron ore imports Rowan Callick and Andrew Trounson March 08, 2006
CHINA has threatened to block Australian shipments of iron ore and cap the price it pays BHP and Rio Tinto in a trade dispute that could stall the nation's fastest-growing export market.
In a brazen bid to hold down prices during annual talks on iron ore contracts, China has already blocked shipments from other countries and is threatening to stop Australian ships carrying ore at prices above its new cap.
China is citing a new ruling that caps import prices at a level BHP claims is below the current price it receives for its ore. BHP and Rio Tinto, which dominate Australia's $19 billion-a-year export trade in iron ore, infuriated China last year when they demanded, and ultimately won, a record increase in iron ore prices for 2005-06.
The Chinese Commerce Ministry has reportedly modified an iron ore licensing system, introduced last year, to ban imports of contracted ore at a higher price than the base negotiated a year ago. This means that, because freight rates have risen, some Australian consignments are being denied official approval.
The new ruling is believed to have been delivered verbally to Chinese steel mills by officials of the Commerce Ministry - almost certainly aware that it could be pursued strongly as a breach of World Trade Organisation agreements.
Australia has been one of the biggest beneficiaries of China's strong economic growth, with Australian iron ore and coal feeding the steel mills churning out products for the country's construction boom.
Soaring iron ore prices and volumes have helped underpin Australia's economic growth, keeping the trade deficit under control and underwriting the massive federal budget surpluses that have fuelled calls for tax cuts.
Rio and BHP were yesterday trying to confirm reports coming from Chinese traders and shipping officials that ships carrying ore at prices above the 2005-06 negotiated prices would be refused import permits.
If correct, the move would be the clearest sign yet that Beijing is prepared to play hardball in resisting calls from the world's big miners for further contract price rises in 2006-07 after being forced to swallow last year's unprecedented 71.5 per cent hike.
The rumours came as Japanese steel mills walked out of the latest price talks with the miners. That raises the prospect of China and Japan, the nation's two dominant iron ore customers, presenting a united front.
If BHP and Rio cannot reach agreement with Beijing, the issue is likely instead to be taken up at a political level. Chinese Premier Wen Jiabao will visit Canberra early next month, and the iron ore spat is now set to take centre stage in his talks with Prime Minister John Howard.
BHP yesterday said the reported cap on delivered Australian iron ore of $US54 a tonne - up to 20 per cent below prices on international "spot" markets - was below its contract prices. If correct, the new price cap "would be very concerning", it said.
"We are hearing rumours of such restrictions being imposed on the Chinese import licences for iron ore but we have received no official confirmation," BHP said. "We continue to seek confirmation via our customers and government channels."
Rio and BHP, along with Brazil's CRVD, the world's biggest iron ore producer, control more than 70 per cent of the global seaborne trade in iron ore.
Last year's price rise, which was driven by China's surging steel production, threatened to spark a diplomatic row between Canberra and Beijing when BHP tried to secure an additional increase. BHP eventually backed away from its demands.
Late last year China's ambassador to Australia, Fu Ying, warned that last year's price increases had been "painful", and that China would in the future be careful over where it chose to source supplies.
A Chinese move to cap prices would appear to be designed to take the heat out of the strong spot market. The miners have been using the high spot-market prices to justify another price increase, and analysts generally have been tipping contract prices to rise 5-20per cent.
Analysts viewed the Chinese move as a negotiating tactic.
Annual contracts are due to expire at the end of this month, but if there is no agreement on price the contracts would usually be rolled over and then price changes backdated. "It is a game of chicken and it will be a question of who is going to flinch first," Daiwa Securities head of research in Melbourne Mark Pervan said yesterday.
But he said the balance of power was still tilted towards the miners given the tight market, a recent recovery in steel prices, and continued rising steel production in China.
