Rio, BHP face supply chain threat
Rio Tinto and BHP Billiton could see their grip on the supply of iron ore to the Asian region loosened significantly as global freight costs become less volatile, two leading European think tanks have said.
A review of the global commodities supply chain has concluded the major resource houses can influence the price of iron ore by deciding to produce a certain amount of the mineral each period, depending on their knowledge of the mine capacity of their competitors.
But in a report on the state of global commodity markets, two European think tanks - the Centre for European Policy Studies and the European Capital Markets Institute - have warned the miners' control of iron ore supply to Asia could be threatened by changes in the global freight industry.
Currently, the world's three biggest miners - Vale, BHP Billiton and Rio Tinto - control about 65 per cent of the world's seaborne iron ore market.
The miners are so big they have a "first-mover advantage" in the regions in which they operate, the report says.
"[An] oligopolistic setting is often influenced by external factors, such as freight industry capacity and easier (cheaper) connectivity between regional areas," the report says. Freight costs are an important part of the seaborne iron ore price and can expose the market to unprecedented volatile patterns.
"Recent changes with the increase in capacity of the freight industry have stabilised costs of freight for some time and ensure easy connectivity at the global level.
"This may increase the accessibility of new regional areas to the global market and reduce space for an oligopolistic setting as marginal costs become less predictable."
Stable freight costs could allow smaller producers to agree to non-profitable prices to win contracts in Asia, and this could move the market away from its oligopolistic "equilibrium".
The report is likely to be welcomed by iron ore newcomers such as Fortescue Metals Group and Gina Rinehart's planned Roy Hill project.
The same report also describes how global investment banks such as Goldman Sachs and JP Morgan have been making billions of dollars in profits by running a network of global commodity warehouses linked to the London Metal Exchange.
It says the price of aluminium stored in a network of LME-linked warehouses in the United States has been artificially inflated by long queues to get the aluminium out.
A recent New York Times report said Goldman Sachs had been exploiting industry pricing regulations set by the LME by "shuffling aluminium among the 27 warehouses it controls in the Detroit area".
"The manoeuvre lengthens storage times and generates millions a year in profit for Goldman, which charges rent to store the metal for customers," the article said.
The report from the European think tanks says the practice could restrict access to an important hedging tool for global market participants and increase the cost of aluminium for final users.
"[It] could ultimately end up affecting the price formation of LME aluminium cash contract as a global benchmark price," the report says.