Trading places

“Count me in”: Fortescue’s Power

In January, China soft-launched the China Beijing Mining Exchange (CBMX), an online iron ore trading platform. The full launch is planned for early May.

At the time, Nev Power, chief executive of Fortescue Metals, Australia’s third largest iron ore miner, said that it was still “very early days” for the China platform.

“We will continue to evaluate it going forward,” Power promised Reuters.

But in just two short months, the evaluation job has been completed. Last week Fortescue joined the CBMX, the first foreign member of the exchange. The CBMX is challenging another new exchange, the Global Ore Market, which is based in Singapore and backed by another miner, BHP Billiton.

Fortescue’s move is not entirely unexpected. Unlike its bigger Australian rivals, it has not diversified into other mineral production, and Chinese steel mills currently buy 95% of its iron ore output. Despite recent volatility in the iron ore market, Fortescue is also going ahead with an $8.4 billion expansion plan to treble production by 2013 to 155 million tonnes. By 2017 it expects output as high as 355 million tonnes.

That means it makes sense for the Australian miner to strengthen its ties with Chinese customers and Zhang Jiabin, an iron ore specialist at Umetal.com, told Caijing magazine that joining CBMX is part of Fortescue’s plan to ensure more buyers of its expanded production.

In return Fortescue has pledged to sell an unspecified volume of ore through the platform, where it is already rubbing shoulders with the 26 founder members; 13 steel mills, like Baosteel and Wuhan Iron and Steel, and 13 other mineral firms, such as Minmetals.

Will Fortescue be joined on the CBMX by its international rivals? ABC News, part of the Australian Broadcasting Corporation, says that there are rumours that the three largest iron ore miners – Vale, BHP Billiton and Rio Tinto – are also in talks to join CBMX. To emerge as the leading sales platform, it will need the international miners to sell a portion of their ore through its exchange.

Correspondingly, the China Iron and Steel Industry Association (CISA) has been making confident noises that the three will soon commit to the CBMX.

“All of the major suppliers will sign accords soon to join,” the CISA chairman told media last week. “We expect to create a fair, transparent environment for spot iron ore trading. We’ll set up a minimum volume of ore that they should sell through the platform.”

CISA’s interest in fair and transparent pricing platforms doesn’t seem to extend to the rival Global Ore exchange, however, with both it and the China Chamber of Commerce of Metals warning its members not to “blindly join the Singapore platform”.

The emergence of the CBMX is the latest development in a longstanding row between China and the major iron ore miners (see WiC56), who command 70% of the global sea-borne trade. Their critics believe that this gives them too much power over prices, even after a shift in 2010 from annual benchmark contracts to quarterly index pricing.

This transition is still not complete but the industry is moving towards floating prices based on daily indices.

Hence the scramble to establish a dominant exchange at which iron ore is priced and sold.

All of this comes too at a time in which the wider outlook for the industry is also unclear.

Last week comments from an executive from BHP that Chinese demand was “flattening” spooked the markets, especially given that all the leading players are implementing expansion plans.

“Uncertainty surrounding Chinese growth rates, coupled with a weakening outlook for steel and the simultaneous growth in Chinese scrap steel supply, could offset some of the positivity surrounding expected iron ore demand and push prices below the $120 a tonne barrier,” predicted the ratings agency Moody’s.

Keeping track: in WiC144 we reported that miner Fortescue had signed up to the new China Beijing Mining Exchange (CBMX), an online iron ore trading platform. As a major buyer of iron ore, China has been promoting the exchange as a way to ensure its steelmakers pay a fair and transparent price – rather than depending on pricing mechanisms fixed by the big miners. For once, the China Iron and Steel Association (CISA) seems to be getting its way. On Tuesday, Brazil’s Vale said it would join, reports the Economic Observer, with Rio Tinto having already agreed to participate. But in what may be the biggest coup of all, the world’s largest miner BHP Billiton also joined on Wednesday, reports The China Daily, citing CISA. (Apr 20, 2012)

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