Iron ore price wars

Since the 1960s, the iron ore market has largely worked the same way each year. After prolonged, often painful, negotiations, miners agree with Japanese or European steel makers on a benchmark price for 12 months. This year, though, several high-stakes games are being played.
The largest miner is Brazil's Vale. Perhaps eyeing a move on Xstrata, it agreed to a 71 per cent price rise with the Japanese. But the next two biggest iron ore miners, Rio Tinto and BHP Billiton, argue with the Chinese for a higher price as their Australian ore is closer, so costs less to ship.
With China absorbing half of all seaborne iron ore, the market is extremely tight. Spot prices in December were about twice the negotiated level. BHP wants to exploit this by selling more ore on the spot market, especially as it is eyeing a combination with Rio that would give it significant pricing power. Rio, which is talking up the value of its businesses to fend off BHP's all-share offer, has done likewise. Fearful of rising prices, the Chinese government has responded by blocking spot-price shipments from the two companies entering the country.
Such posturing is unlikely to make a difference. Chinese steelmakers need the ore, so hefty price increases will ultimately be agreed. Supply and demand remain in the miners' favour, but it will be hard for steel producers to resist gradual moves toward more open market pricing. As for the potential merger, Rio has the greater exposure to iron ore. But its shares have broadly tracked BHP's since the latter's offer was rejected, suggesting portfolio differences are already discounted. So the result of the iron ore negotiations, should not affect the dynamics of the merger. This deal is about synergies. There is nothing China can do to change that.