Frustration behind Chinese accusations of miners' iron ore market manipulation

To hear the Chinese rail against the big three miners for "manipulating" iron ore prices is nothing particularly new. But it is rarer for China's top economic planning agency, the National Development and Reform Commission, to get involved, let alone in such abrasive fashion.

To hear the Chinese rail against the big three miners for "manipulating" iron ore prices is nothing particularly new. But it is rarer for China's top economic planning agency, the National Development and Reform Commission, to get involved, let alone in such abrasive fashion.

The steel sector's mouthpiece, the China Iron and Steel Association, has long been waging a campaign against the way the iron ore price is set, after being forced to shift to the current short-term spot price based on price indices in 2009. For decades before that, prices were set by annual negotiations.

There is some merit in the accusations - most analysts believe the big miners do have the scope to opportunistically push a few shipments around to strategically cash in while prices are high.

Similarly, the uniform destocking seen in China's steel mills late last year, amid the uncertainty of the leadership transition in Beijing, saw iron ore prices plunge precariously to three-year lows.

But it is the miners - especially low-cost producers such as BHP and Rio Tinto - who are earning healthy margins on the sale of iron ore. And despite what you hear about China's voracious appetite for our biggest export earner, their steel sector is inefficient, over-capitalised - and bleeding losses.

Much of the NDRC's accusations stem from frustration that while it relies on imports for two-thirds of its iron ore supply, it has little control of pricing.

But manipulation or not, the iron ore price appears on the way down, if gloomy dispatches from a major iron ore conference in Beijing last week are any indication.

Commodities analysts are lining up to tip sharp falls in the iron ore price. Deutsche Bank is tipping US$115 a tonne by year end; J Capital is tipping it to fall below US$100 a tonne by mid-year; most bearish of all is Tom Price of UBS, who says the price may tumble to US$70 a tonne by September.

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