Is China backtracking on attempts to control iron ore? - Mr Clyde Russell
Reuters cited Mr Clyde Russell market analyst of Reuters as saying that it may be too early to start beating the drums of victory for free market capitalism but there are signs that China is stepping back from attempts to control the iron ore market.
Mr Russell said that Just three months after accusing major iron ore producers of manipulating prices, China plans to scrap it's decade old import licensing system, a move that may eliminate middlemen in the market, lower costs for steel mills and improve transparency. It also looks like a strategic retreat for the world's biggest buyer of iron ore in its battle to win pricing control from the big three producers, Brazil's Vale and the Anglo Australian pair of Rio Tinto and BHP Billiton .
He said that the planned end of the licensing system will happen in the H2 of the year. The current system requires import qualification licences to be granted by government backed industry bodies like the China Iron & Steel Association. It was designed to eliminate speculative traders from driving up prices and force the steelmaking industry to present a united front against the producers. However, it allowed middlemen to rent out licences and thereby drive up costs for steel mills, who couldn't import directly.
Mr Russell said that under the proposed changes, iron ore importers will only need the same type of licence required by other commodity buyers, meaning steel mills should be able to buy directly from miners and traders alike.
While this may not have much impact on iron ore prices in the short term, it could have important ramifications over time by lowering the cost of imported ore versus domestic supplies, which may boost the volume of foreign ore. It's also not clear how plans to scrap the licensing requirements will fit with another recent proposed change, namely to force importers to use a domestic trading platform.
According to a Reuters report in April, New licences were to be conditional on importers using the China Beijing International Mining Exchange platform. The big three miners are members of the CBMX but they also back the Singapore based globalORE system, which currently handles more of the physical trade than its Beijing rival.
The Chinese move to support the CBMX was most likely aimed at trying to wrest pricing power away from the miners, especially given the allegations by authorities that the big producers manipulate prices.
China's top economic planner said in March that the miners were behind the 83% rally in the benchmark Asian spot price between September's three year low and a peak of USD 158.90 per tonne in February. This was an extraordinary accusation by the National Development & Reform Commission especially since it came without any substance, other than an unsubstantiated claim that shipments were held back in order to control supplies and send a fake market signal.
The NDRC appeared to conveniently ignore the fact that the rally in prices coincided with record imports by Chinese steel mills, with December being the strongest on record. It's also no surprise that the recent price slump has resulted in a surge of imports again, with April and May being the third- and second-strongest months, respectively.
Source - Reuters