Beijing: 2010 negotiations between China and the big three iron ore miners are set to be among the most contentious yet. Set against a backdrop of five consecutive years of record pricing, a complete failure to see eye to eye in 2009, and the mooted tie up between the big two Australian miners, Rio Tinto and BHP Billiton, Beijing is moving to take back some of the initiative at the negotiation tables this time round.
The timing this week of a massive 1bn tonne iron ore find in the northern province of Hebei was, no doubt, not coincidence, another subtle message from China that is looking at all alternatives to simply relying on Australian ore dominance.
Likewise, the news leaked this week in state run China Daily newspaper that Vale has offered to fix freight charges for Chinese mills at $25 a tonne for a two-year contract, or $24/tonne for a four-year contract, is a hammer blow to both dry bulk shipowners and Australian miners. Brazil's longer distance to China has always been a big disadvantage against the Australians and has in the past helped make capesize rates soar to six-digit dollar figures by tying in much of the cape fleet into a longer tonne/mile scenario. Chinese buyers paid more for Australian ore in the 2008 contract because Australian miners argued that their lower shipping costs, compared with Brazilian freight, justified a premium for Australian ore. This counter move by Vale nixes that argument ahead of the 2010 negotiations.
"Some Chinese companies are believed to have signed three to four year price contracts with Vale for fixed freight charges which are 20 to 30 percent lower than normal rates," the China Daily stated.
Vale is also moving to control far more of its supply chain, therein reducing its uncompetitive transport costs. These measures include increasing output, upping terminal capacity, ordering 16 massive 400,000 dwt very large ore carriers in China plus capesizes in Korea, and securing a dedicated 400,000 dwt terminal in Qingdao. Vale, and the Chinese mills, have clearly had enough of being held hostage to volatile charter rates. The two have colluded to avert the sky high, unpredicatable freight rates seen from 2003 to 2008.
Freight costs from Brazil to China were around $35 per ton on Tuesday, while the spot price of Brazilian iron ore was 850-860 yuan ($125) per ton.
"The move underscores the interdependence between Vale and China," said Yu Liangui, senior analyst from consultancy firm Mysteel. "As a long-term strategy, Vale needs to stabilize its exports by reducing transportation costs to grab more market share in China from its rivals Rio Tinto and BHP Billiton."
Nevertheless, China's huge demand for iron ore, which has flummoxed the most seasoned of commodity watchers this year, will ensure the world's most populous nation will be spending more on Australian iron ore once again in 2010. In the first eleven months of this year, China imported a total of 565.9 million tonnes of iron ore, up 38% from the same period of last year. No analyst this time last year would have predicted even a 20% increase. China may import 70% of its iron ore needs this year, up from 50 percent last year, Baosteel's Chairman Xu Lejiang said December 3.
Now all analysts are predicting rising Australian prices for next year with Macquarie Group the most bullish. Australian benchmark iron ore prices may rise 30 percent, Macquarie analysts said yesterday in a report. That compares with their previous estimate for a 10 percent gain,.
Despite Vale and Beijing's best efforts it looks likely China will be having to open its wallet wider next year for yet more record Australian ore deliveries. Negotiations will be fierce.
A more in depth look at the dry bulk market, including the state of the iron ore price negotiations will be included in Issue 1 of Seatrade magazine next year. [17/12/09]
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