--Clyde Russell is a Reuters market analyst. The views
expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, June 17 (Reuters) - 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.
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
The planned end of the licensing system will happen in the
second half of the year, according to a Reuters report on June
13 that cited a source with knowledge of the matter.
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
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.
New licences were to be conditional on importers using the
China Beijing International Mining Exchange (CBMX) platform,
according to a Reuters report in April.
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 percent rally in the benchmark Asian spot
price between September's three-year low and a
peak of $158.90 a tonne in February.
This was an extraordinary accusation by the National
Development & Reform Commission (NDRC), 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.
Spot iron ore fell more than 30 percent from its February
high to a low of $110.40 a tonne on May 31, the lowest in almost
eight months. It has since recovered slightly to $113.60 a tonne
on June 14.
As I wrote in March, there was probably a stronger case to
say that iron ore was manipulated weaker when the spot price
plunged 42 percent between April and September last year, even
as China's imports held up remarkably well considering the
weaker economic outlook prevailing at that time.
Nonetheless, the concern remains that iron ore prices are
subject to manipulation given the situation of one major buyer
that accounts for more than 70 percent of the global seaborne
market and three big producers that supply roughly that quantum.
Currently iron ore is priced on benchmarks produced by
Platts and Metal Bulletin, who in turn base their assessments on
collecting information on deals from market participants.
While the methodology used by these agencies is solid and
robust, the system still relies on everybody being absolutely
honest, and in the absence of a deliverable futures market,
there will always be the temptation for involved parties to try
and manipulate prices in their favour.
But I would argue that it's difficult to do this on a
sustained basis, although a liquid futures market where
participants have the obligation to deliver on contracts would
certainly boost transparency.
But for now, it appears the Chinese may just be resigning
themselves to the reality that they are unlikely to be able to
control the iron ore market, so they may as well do what's
possible to cut unnecessary costs from the system.
Disclosure: At the time of publication Clyde Russell owned
shares in BHP Billiton and Rio Tinto as an investor in a fund.