Cartel v Cartel As China And Australia Exchange Trade Barbs
Unloading iron ore in port in Qingdao, China. (Photo by Costfoto/NurPhoto via Getty Images)
NurPhoto via Getty Images
A ‘cartel deadlock’ could be developing in a trade dispute between Australia and China over the price of iron ore which has fallen by $18 a ton (16%) over the last three months to $93/t.
The fall favors China which wants cheaper raw material for its financially stressed steel industry.
Australia’s iron ore mining companies, which are hugely profitable when the price is above $100/t, have previously resisted pleas for price cuts saying the free market is working as it should, matching buyers and sellers.
A BHP iron ore train arriving at Port Hedland. Photo Fairfax Media via Getty Images.
Fairfax Media via Getty Images
Until recently the China v Australia iron ore trade was essentially a free market with suppliers and customers negotiating over tonnage and price.
But that conventional relationship changed last year when China unleashed its government-controlled commodity buying agency, the China Mineral Resources Group (CMRG).
With near total control over purchases of iron ore (and other raw materials) the CMRG started to apply pressure on Australian iron ore miners, starting with the biggest, BHP.
First step in the pressure tactics was to ban specific grades of ore mined by BHP, focusing on material with lower iron content.
That warning shot aimed at BHP was followed by similar treatment for a smaller miner, Fortescue, a company controlled by multi-billionaire Andrew Forrest.
Negotiate Fairly
The Australian miner with closest ties to China, Forrest was annoyed by CMRG’s attack, calling on the commodity buying cartel to ‘negotiate fairly’.
The importance of the iron ore price to Fortescue is paramount because it is the company’s primary source of revenue whereas BHP and another big Australia iron ore miner, Rio Tinto, have other interests, including large copper operations.
The Australian Government, which receives the lion’s share of the estimated $50 billion a year in taxes and royalties paid by the country’s iron ore miners is becoming concerned about the aggressive trade tactics of the CMRG.
Retaliation against the Chinese commodity cartel is reported to be brewing in the form of an Australian iron ore cartel, starting with possible approval for the miners to pool their resources in what would normally be against anti-monopoly law.
Work Together
No details have emerged about the plan for an Australian sellers’ cartel, but it is generating interest, including that of a former treasurer (finance minister) in the Australian Government, Joe Hockey.
Speaking on the sidelines of a mining conference in the goldmining center of Kalgoorlie, Hockey said he was supportive of a plan for Australian companies to “work together” to meet head-on failures in the market.
Former Australian Treasurer Joe Hockey. (Photo by Stefan Postles/Getty Images)
Getty Images
Hockey, who has also served as Australian Ambassador to the U.S., said he wanted a competitive market, fair pricing and to not have Australian companies in the firing line.
The close trade relationship between Australian iron ore miners and Chinese steel mills means that each side depends heavily on the other.
China’s introduction of a common buying agency has disturbed what has been an evenly balanced relationship which has sometimes favored one side over the other, but which eventually finds equilibrium.
Whether a balanced market can be achieved with competing cartels will be an interesting experiment in a sometimes-irritable trade relationship.