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China struggles to control increases in iron ore price

China, the world's largest buyer of iron ore, blocked BHP Billiton Ltd and Rio Tinto Group from selling the raw material on the spot market to press them to settle contract prices, research company CBI China Co said.

The China Iron & Steel Association (中國鋼鐵工業協會) and China Chamber of Commerce of Metals, Minerals & Chemicals Importers & Exporters (中國五礦化工進出口商會) told importers they would have their licenses suspended for buying Australian iron ore on the cash market, David Du, a CBI analyst, said in a telephone interview from Shanghai yesterday.

Rio and BHP are locked in talks to settle annual contract prices with Chinese steelmakers, as Rio sought to get more than the 71 percent price gain won by rival Cia Vale do Rio Doce.

The Chinese government two years ago imposed price caps on imports in an unsuccessful attempt to limit increases.

"It shows the resentment of the Chinese mills toward BHP and Rio for selling more iron ore on spot market, instead of concluding a contract as in the past," said Helen Lau, a Shanghai-based analyst at Daiwa Securities Group Inc.

Rio, based in London, sold iron ore on the spot market at as much as US$190 a tonne in December, more than twice the equivalent of US$85 a tonne it sold under contract, it said then.

It plans to triple iron ore sales in the cash market to 15 million tonnes a year, up from 4.5 million tonnes last year.

Around 15 percent of BHP and Rio's ore sales to China have been sold on the spot market in past years, Du said.

Qi Xiangdong (戚向東), vice secretary general of the China Iron & Steel Association, said he was unaware of the spot sale boycott, adding that "most of the ore purchases should be done through long-term sales."

Officials at the China Chamber of Commerce of Metals, Minerals & Chemicals Importers and Exporters were not available for comment. BHP spokeswoman Samantha Evans declined to comment.

"Our position is we are still involved in pricing discussions," Gervase Greene, Rio spokesman, said by telephone from Perth. "We have said we expected to sell up to 15 million tonnes on the spot market this year and that hasn't changed."

Iron ore sales from smaller companies in Australia have not been blocked, Michael Kiernan, chairman of the Perth-based producer Territory Resources Ltd, said yesterday.

"It's a move aimed to press miners back to contracted iron-ore price talks and to gain a foothold," Du said. "China doesn't like spot sales because the spot prices are more volatile and potentially more upside risky."

Rio has been pressing Chinese steelmakers to accept a freight premium to reflect the lower cost of shipping ore to Asia from Australia than Brazil, where Vale is based. Chinese steelmakers have rejected the demand, Anshan Iron & Steel Group (鞍山鋼鐵), parent of the country's second-largest mill by market value, said on March 5.
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