China should stop hogging profits from domestic sale of Australian iron ore

Business Materials 13 October 2007 08:10

Chinese iron ore importers should be more willing to share profits with Australian miners, and stop taking advantage of both the price difference between Australian and Brazilian iron ore and their powerful position in China when selling in the domestic market, an industry official said in a recent exclusive interview with Interfax .

"The issue of the price differential for sea transport between Australia and China, and South America and China, is creating ill will as the Australians see the Chinese importers taking all the profits," Dr. Desmond William, president of the Western Australian Branch of the Australia China Business Council (ACBC), said.

ACBC currently has more than 100 member organizations, including large mining, oil and gas conglomerates, and the organization is dedicated to promoting business and trade between the two countries.

Dr. William further claimed that Chinese importers are selling-on the relatively cheap Australian iron ore in the Chinese market at South American import prices, and not passing the benefits of cheaper freight rates from Australia onto Australian mining companies.

China's soaring demand for iron ore has sent freight rates sky-high this year, and resulted in iron ore CIF prices to Chinese ports undergoing repeated hikes since the beginning of the year. Moreover, while Chinese importers pay FOB prices to Australian miners, they are selling iron ore at current Brazilian CIF prices in the domestic market, and taking advantage of the huge price difference between freight rates from Australia and Brazil. Freight rates form Brazil to China are approximately two-thirds more than freight rates from Australia to China.

The iron ore freight rate from Brazil's Tubarao to China's Beilun/Baoshan ports hit $85.65 per ton on Oct. 10th, up $3.4 per ton from the previous day, while freight rates from Western Australia to China's Beilun/Baoshan ports reached $36.33 per ton, up $1.49 per ton.

"There are extra profits for the importers at the expense of the Australian iron ore exporter, and the Australian exporters feel they should share some of that profit. Perhaps a compromise and sharing of that profit differential would be a fair solution for the Australian iron ore exporters," Dr. William said.

Hu Kai, senior analyst from Beijing Umetal, a leading domestic steel industry consultancy, told Interfax that as iron ore imports are controlled under license in China, it is common practice for licensed Chinese steel mills and traders to resell imported iron ore to small-scale domestic steel mills at inflated prices, and many of them sell the cheaper Australian iron ore in the spot market at Brazilian iron ore CIF prices. Australian miners are urging Chinese importers to pay a shipping premium, on top of the FOB price, in order to fill the gap between their sale price and the price at which Chinese importers and traders sell iron ore in the domestic Chinese market.

However, the last time Australian miners raised the shipping premium issue in the 2005 contracted benchmark price negotiations, the suggestion was received coldly by Chinese steel mills.

"I think the two main Australian miners (BHP Biliton and Rio Tinto) will again request Chinese steel mills to pay a shipping premium during the 2008 contracted benchmark iron ore price negotiations, as freight costs are on the rise and now make up a significant part of iron ore prices. However, Chinese steel mills will never accept this, and it is futile for the Australian side to decide to change the rules of the game that have been in place for more than 20 years [annual FOB contracted benchmark price negotiations]," Hu said.

The contracted benchmark iron ore price negotiations for 2008 are due to commence in November this year for contracts from April 1, 2008 to March 30, 2009, and both sides are busy building cases to support their own causes.

"The current iron ore price negotiations are front page news in Western Australian and Australian press. I believe the negotiations must recognize that iron ore prices will be determined by the market forces of supply and demand, and within that framework each party should recognize the need to maintain good relations for the sake of long-term business," Dr. William said.