Markets: Beijing's iron ore fist

China’s premier wants lower iron ore prices and Rio Tinto and BHP may eventually have to oblige.

Murilo Ferreira and Sam Walsh seem to be two happy chaps. The two chief executives of the world’s two biggest iron ore miners, Vale and Rio Tinto, have reason to be. The spot price for iron ore imported through the north east Chinese city of Tianjin is up 21 per cent since May 31 at $US133.10 a dry metric tonne. Walsh sounds almost giddy talking about the iron ore price. “The prognosis of iron ore continues to be strong,” he says. Chinese steel output will rise 10 per cent to 780 million tonnes this year, Ferreira predicts. “China has once more proved the pessimists wrong,” he says.

Enter Chinese Premier Li Keqian. He’s not happy about the iron ore price and made his views known in a meeting with BHP Billiton chief executive Andrew Mackenzie. Mackenzie told The Australian China wants “lower prices, lower prices”. Wang Jiahua, executive vice president of the China Mining Association, not surprisingly, agrees. Wang says China is sick of buying things at high prices and providing the rest of the world things at low prices. The relationship between foreign iron ore producers and Chinese steelmakers should be like lips and teeth, he says.

China once described its relationship with North Korea as being as close as lips and teeth. Beijing provides a lifeline to Pyongyang by doing business with a regime that has blighted the Korean peninsula through its rule.

Vale, Rio Tinto and BHP may say that their relationships with their Chinese buyers are indeed interdependent. They may even think some of the Chinese steel executives are their friends. But for all the meals they have shared and visits to each others’ mine sites or steel mills, the relationship is still one between buyer and seller. The iron ore miners want the highest possible price. The steelmakers want the lowest and aren’t afraid to call in support from the highest echelons of government to get it.

Moreover, the China also has a domestic iron ore mining lobby it has to placate. China’s iron ore miners employ thousands and their wages help sustain businesses in towns and cities across a country whose average yearly income is more than a quarter less that it is of an Australian.

China’s current senior leaders have just started their decade-long term. Social stability is paramount in their minds. Struggling with complaints about rising prices and concerns that foreign competition is forcing locals out of business it wants to exercise some control over the prices it pays for its commodities. The smiles of Walsh and Ferreira may not last long.

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