--Clyde Russell is a Reuters market analyst. The views expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, March 7 (Reuters) - China’s accusation that the big three iron ore miners manipulated supply in order to spark a recent 83 percent rally in prices is contradicted by its own customs data.
Yes, it’s true that spot iron ore surged from a three-year low of $86.70 a tonne in September last year to a peak of $158.90 last month.
But it’s also a fact that China’s imports of the steel-making ingredient have been at record highs, with the three months from November to January being the strongest on record.
The National Development & Reform Commission, China’s top economic planning agency, seems to have ignored this inconvenient fact when lashing out at the iron ore miners in a strongly-worded statement on its website.
“The three major miners and some traders have delayed shipments and held back stocks to control supplies in order to send a fake market signal that there was a supply shortage,” the NDRC said.
The world’s three biggest iron ore suppliers are Brazil’s Vale, and the Australian pair of Rio Tinto and BHP Billiton.
Together their output is roughly equivalent to China’s imports, which reached a record 745.5 million tonnes last year, or about two-thirds of global seaborne iron ore trade.
This concentration of market power in the hands of the big three is important background, as Chinese steel makers have waged a long-running campaign against the way the market operates.
Since 2009 steel mills have been forced to buy supplies on a short-term basis using price indexes, instead of the annual contracts that used to be the norm.
This has allowed the producers to more rapidly raise prices in times of high demand, such as recently.
However, it has also allowed prices to fall much more rapidly in times of soft demand, as happened last year when spot iron ore plunged 42 percent between April and September.
At that time there wasn’t a squeak from the Chinese steel companies or authorities about price manipulation, even though mills were defaulting on cargoes and supply contracts in August last year.
In fact, looking at the demand-price scenarios from last year, there seems to be a stronger case that prices were manipulated lower in the second and third quarters of last year, rather than that they were artificially boosted in the fourth quarter of 2012 and the first quarter of 2013.
As prices declined between April and September, ostensibly because of concern over the slowing growth of the Chinese economy, iron ore imports remained fairly robust.
Imports totalled 63.8 million tonnes in May, then dropped to 58.31 million in June before rising for the next three months to peak at 65.01 million in September.
They did decline in October to the lowest for the year at 56.43 million tonnes, but after that they surged, first to 65.78 million in November, then the record 70.94 million in December, before slipping to 65.54 million in January, which was still the third-strongest month ever.
What this shows is that China maintained purchases of iron ore during the period of price weakness, when steel demand was supposedly falling, and then as soon as the price bottomed started buying at unprecedented rates.
I‘m sure the Chinese steel mills and authorities would argue that the record imports from November onwards were a reflection of stronger demand as the economic growth outlook improved, coupled with re-stocking at the then-prevailing lower prices.
I‘m equally sure they would angrily dismiss any suggestion that they had manipulated the price lower ahead of planned inventory rebuilding.
But in some ways what the NDRC is accusing the miners and traders of doing during the recent rally is exactly what may have happened as prices dropped last year.
The Platts index that is used for many deals tries to capture as many as possible of the offers, bids and actual transactions being conducted in the market.
The NDRC’s criticism is that some deals done via tender are included in the price assessment, and these helped drive prices up as the limited number of participants allowed the miners to extract a higher price.
But surely the same would be true as prices declined? In a falling market the miners are forced to sell at whatever they can, allowing buyers to continually underbid and send prices even lower.
The NDRC statement was short on evidence, and it’s too early to say if there was any attempt at price manipulation.
Certainly, a small number of major players in an opaque market isn’t the best recipe for transparency.
The answer is of course a deep, liquid futures market with a deliverable contract, but that would require the Chinese to open up their financial markets and systems to all comers, something that isn’t even on the cards as yet.
The NDRC’s accusations should be viewed through the prism of Chinese unhappiness that they don’t have any real control over iron ore, either the supply or the pricing.
But it’s always best to let the data do the talking.
The spot iron ore price index has tended to track Chinese imports rather well since it was launched at the end of 2008.
The only time the price diverged significantly from the import trend was during last year’s sharp decline. (see graph)
It would seem that an objective analysis would conclude that the price decline in the middle of last year was the outlier, rather than the rally from October to February.
Disclosure: At the time of publication Clyde Russell owned shares in BHP Billiton and Rio Tinto as an investor in a fund.