WHERE IRON IS BIGGER THAN OIL OR GOLD / THE NEW YORK TIMES

July 11, 2009

Where Iron Is Bigger Than Oil or Gold

By BETTINA WASSENER

HONG KONG — Oil, gold and rice are the commodities that often grab headlines. But for countries like China and Australia, it is the price of iron ore that can determine whether their economies go boom or bust.

For months, China has been locked in an intense, behind-the-scenes dispute over iron ore pricing with the world’s top miners, having refused the price that steel makers in other major countries like Japan and South Korea had already accepted.

The price haggling is an annual ritual that pits China, now the world’s third-largest economy, against exporting countries like Australia, as each acts in its best national interest.

In the latest escalation of tension in negotiations this year, China has detained an Australian national who is the chief negotiator for one of the world’s mining giants, Rio Tinto, and accused the person of stealing state secrets. Three Chinese nationals working for Rio Tinto have also been detained.

Whatever the details of the accusations, the detentions underscore the growing importance and extreme sensitivity of what might to outside eyes appear an arcane, dull and mysterious business: iron ore.

It may not command the political attention of oil — over which wars are waged — but iron ore ranks among the most important commodities in the world, the main ingredient in steel that goes into construction, bridges and ships.

China, which is rapidly expanding its cities, imports about half the world’s supply each year. Japan, the world’s second-largest importer of iron ore, imports about 15 percent. South Korea, Germany and France follow.

About 850 million tons of iron ore were shipped around the world in 2008. With prices averaging about $90 per ton last year, the market totaled between $75 billion and $80 billion.

Still, the intricacies of the iron ore market remain below most people’s radar. No wonder, as most of the world’s ore, unlike oil or stocks, is not traded on global exchanges. Instead, contracts are agreed upon annually between producers like Rio Tinto, BHP Billiton and Vale — which account for three-quarters of the market — and the steel makers who buy the ore, like Bao-steel Group of China and Nippon Steel Corp. of Japan.

Each year, these companies meet behind closed doors in talks that can last as long as six months to determine the price at which various types of ore are to be shipped during the next year.

This benchmark contract system accounts for about 70 percent of the market and is a system that gives miners the predictability they need to make the huge capital outlays needed to extract the ore from the ground. Buyers also enjoy that predictability. But with so much of the price fixed a year in advance, the stakes are huge.

And this year, with the jury still out on how rapidly the world’s economy — and with it the demand for iron ore — will recover, the annual round of pricing negotiations has been especially intense.

Japanese and South Korean steel makers recently accepted a price 33 percent below the previous year’s level. But breaking the usual practice of adopting these earlier agreements, China has dug in its heels and is holding out for a larger reduction, of as much as 45 percent.

It can afford to. China’s growing economic importance, especially in a year of crisis like this one, has given the country’s negotiators unprecedented clout.

“In the last 15 years or so, the global market has gone from 400 million tons a year to about twice that — and all that has been because of demand from China,” said Peter Strachan, an independent analyst in Australia. “In the last five years or so, China has become absolutely dominant in the marketplace.”

In the world of iron ore trade, the relationship between China and Australia is especially tight-knit. China takes up 80 percent of the ore shipped from Australia, said another analyst, who spoke on condition of anonymity because he was not authorized to speak to the media.

The arrests could hardly have come at a more critical juncture in the negotiations, he said.

Copyright 2009