A Spy In The House Of Iron?

July 13, 2009

Complications surround the extremely critical Chinese iron ore negotiations - and not just the usual ones.

  • Negotiations are like the energizer bunny: They keep going, and going ...
  • Rio Tinto manager arrested, but why?
  • China still importing iron


With all of the news, gossip and rumor coming out of China about commodities (are they secretly stockpiling copper more than they admit? How many full ships are actually sitting in Shanghai?) it can be difficult to separate fact from fiction with regard to the long-drawn-out iron negotiations.

Here's one fact: The deadline for the benchmark price agreement between China and the big iron ore miners (Rio Tinto, BHP and Vale) has long since passed - June 30 is but a memory.

The sticking point? Not whether prices should come down - both sides agree they should - but just how much. China is interested in reductions in the neighborhood of 40-45%, while the iron ore companies are thinking more along the lines of the 33% price reduction Japanese steel maker Nippon and South Korean steel mills have already agreed to.

Beyond that fact, what is happening with negotiations gets a bit fuzzy.


Done, Active Or Stalled?

Last Wednesday, the Chinese Business News reported that unnamed sources said negotiations between Rio Tinto and China had concluded and that China had accepted the same benchmark prices that Japanese steelmakers had agreed to for a period of six months. There were no other confirmed sources, and no names were released, so the market took the news with a grain of salt. The market's skepticism was wise in this case, because by July 9, the denials started rolling in.

The big iron ore companies negotiate with the China Iron and Steel Association (CISA), whose members produce the majority of the steel in China. As Tian Zhiping, vice president of China's second-largest steelmaker, Hebei Iron and Steel, put it, "China Iron and Steel Association would inform us immediately if it's going to sign the agreement, but so far we haven't heard anything."

So we think it most likely that deals are still on the table. But of course, there's the James Bond problem. How much negotiation is occurring when one of the main participants in those negotiations is being held on charges of bribery and stealing of economic secrets?


Muddy Waters

On July 5, Stern Hu, general manager of Rio Tinto's iron ore operations in China, was arrested in China. The news hit the media on July 8 in Australia - plenty of time for the markets to react to the news. And react, it did. Rio Tinto's share price on the NYSE Arca dropped from a close of 147.29 on July 7 to close at 125.68 the following day - a one-day drop of 16.73%.


Performance of RTP and BHP - July 2 - July 10, 2009


In the intervening few days, there has been much speculation about the possibility of political motivation behind the arrest. With all due respect to our friends across the Pacific, getting arrested in China is no picnic. Mr. Hu (and three associates) has apparently not technically been charged, but has been accused of rather vaguely "stealing state secrets."

But what that means is up for discussion. The Australian in calling shenanigans on the whole thing:


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