Apr 17, 2012 05:13 PM

Steelmakers Flex Muscle on Ore Platform


(Beijing) – The world's largest iron ore supplier, Vale SA, signed an agreement on April 17 to join a newly launched spot trading platform for iron ore in China.

Following Fortescue Metals Group and Rio Tinto, the Brazilian mining giant is the third international miner to become a founding member of the platform. Promoters say it will give China's steelmakers more control over the prices they pay for iron ore, particularly the huge quantities shipped from Australian and Brazilian mines.

Testing began March 29 for the first-of-its-kind platform. After it is fully launched in May, according to its operator Beijing International Mining Exchange, the annual transaction volumes are expected to grow to 100 million tons, covering about 20 percent of all iron ore imported from spot markets by China. BIME Vice President Liang Ruodong has frequently called this tonnage level "ideal."

China last year imported some 686 million tons of iron ore,  according to Liang. About 72 percent of that amount was bought by the nation's state-run, foreign-domestic joint venture and private mills through global and domestic spot markets.

China produces and consume more of this multipurpose metal than any other country, but the nation's steelmakers have long cried foul over pricing systems they say favor the big mining companies that control most of the planet's ore supplies.

The world's largest and second-largest miners, BHP Billiton and Rio Tinto, bowed to the complaints a few years ago by introducing spot pricing and abandoning a system of closed-door price negotiations. The negotiating system had consistently strained the miners' relations with steelmakers, sometimes irking the Chinese government.

Most deals in 2010 and last year were priced according to a spot index set by the commodities data provider Platts. The Platts index was replaced last fall by the China Iron Ore Price Index (CIOPI), compiled by the steelmakers' main trade group, the China Iron and Steel Association (CISA).

Mining companies have supported using these spot pricing systems. In addition, BHP Billiton formed its own, Singapore-based spot price mechanism.

But even after CIOPI's start-up, Chinese steelmakers continued to claim their ore costs were too high. They said prices should fall further to levels consistent with their huge share of global ore demand.

CISA crystallized this criticism by arguing that spot pricing systems are too opaque and can be easily manipulated by mining companies. The trade group was even dissatisfied with its CIOPI system.

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