If you had to pick the commodity getting most attention during WiC’s first two years of reporting, it would probably be iron ore.
In fact, iron ore became something of a touchstone topic, linked as it was to China’s voracious appetite for natural resources, which was hitting new heights as steel demand ballooned after the launch of the nationwide stimulus campaign.
Adding further colour: a backdrop of bruising confrontations between ore producers and irate Chinese steel mills, some bad-tempered wrangling over bids for foreign mines, and even high profile arrests of industry insiders back at home.
By comparison, the trail has gone a little cold this year.
But a new debate has cropped up: whether iron ore consumption might be a better indicator of Chinese economic health than other commodities, like copper.
The argument is that ore goes into steel, which then ends up in assets very much rooted in the domestic economy, like roads, bridges and railways.
Compare that to copper, much of which is going into goods being assembled for export. Hence the view that the red metal might be a better indicator for world demand, while iron ore points more to what is going on in China itself.
Iron ore also lacks the “speculative froth” of other commodities, says Reuters, because it is still absent from most of the commodity bets made by the big investment funds. Prices are then more driven by supply-and-demand basics than by bigger-picture sentiment.
Of course, the main change in the iron ore business over the last year has been the shift away from annual contracts between miners and steelmakers. Rates are now calculated on short-term cycles anchored against spot prices.
CISA, the industry body representing Chinese steelmakers, has always argued that, as the biggest buyer, Chinese companies should have much more of a say in the industry, especially in being able to negotiate better ore prices.
And that positioning now seems to include how the commodity is going to be priced, with CISA planning to launch an index of its own at the start of October.
The rationale here is that, as index compilers, they have better access to the daily transactions of key participants like Sinosteel and China Minmetals, and so will be able to offer a clearer picture of industry goings-on.
“We are also able to collect data from all domestic mines and 35 ports nationwide,” Luo Bingsheng, a senior CISA official told reporters.
Rio Tinto, BHP Billiton and Vale may beg to differ in their own interpretation of what is best for the industry. But Shanghai Securities News wonders if CISA has not already missed the chance to push for an index of its own design. Something might have been entrenched in the early days of the new pricing regime, says the newspaper. But the several homegrown indices emerged (one produced by news agency Xinhua, and others by similarly inexperienced providers).
That meant that the initiative was lost and the miners were able to steer the industry towards data from international sources, especially an index offered by Platts, a leading authority on commodities.
The problem, says the Chinese side, is that the international indices are too reliant on data provided by overseas miners and traders. Instead, China’s steelmakers should demand something that incorporates more of their own information.
Will CISA be able to redress the balance with its own index? Some of the largest Chinese buyers, like Baosteel, are already reported to be relying on Platts data, according to the domestic media.
Then again, Li Xinchuang, CISA deputy secretary-general, has more recently moved to downplay the indices debate, saying he’s more concerned by a quasi-monopoly among the ore suppliers. Li wants Chinese enterprises to invest in resources away from Brazil and Australia, where the incumbents are strongest, and in countries like Peru, Chile and Canada instead.
“China currently owns less than 10% of its imported iron ore,” he told the China Daily in July. “We should seek 50% of ore from Chinese-invested overseas resources in the next five to 10 years.”
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