(Repeats item issued earlier with no change to text)
--Clyde Russell is a Reuters columnist. The views expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, Feb 23 (Reuters) - Iron ore should go back to the future and reinstate annual contract pricing, according a former executive of top miner Rio Tinto. He’s wrong.
Mal Randall, who spent more than 25 years at Rio Tinto and also helped set up an Australian iron ore miner, said the move to iron ore spot pricing from 2010 onwards was a disaster, the Australian Financial Review reported on Monday.
Up to a few years ago, iron ore had been priced through annual talks between steelmakers and their largely Australian suppliers.
This changed, largely at the behest of former BHP Billiton chief executive Marius Kloppers, who wanted to take advantage of a shortage of supply to generate higher returns for his iron ore mines.
“It was orchestrated and brought in by a guy that has no responsibility now, Kloppers who used to run BHP,” the newspaper quoted Randall as saying. “It’s great to make these changes and then he’s gone.”
Randall, who now chairs mineral sands company MZI Resources, is correct insofar as the spot market pricing is no longer working in the favour of the big miners.
BHP Billiton, Rio Tinto and Brazil’s Vale reaped the benefit of the switch in the initial period as Chinese demand for iron ore exceeded available supply, driving spot prices to record highs.
Asia spot iron ore .IO62-CNI=SI reached $191.90 a tonne in February 2011, but has since plunged 67 percent to $63.40 on Feb. 18, the most recent day of trade before the lunar new year holidays.
But the reason behind the sharp decline isn’t the move to spot pricing, or even market manipulation by traders, as alleged by Randall in the article.
It’s simply that the major iron ore miners have brought too much to market at the same time that China’s steel demand appears to be peaking.
The big three miners, along with number four Fortescue Metals Group, are in the process of adding some 400 million tonnes a year of iron ore capacity.
This will be further boosted by the 55-million-tonne-a-year Roy Hill mine in Western Australia state, which is due to start operations later this year, and Anglo American’s Minas Rio project in Brazil, which has a capacity of about 26 million tonnes.
While the majors have had some success in using their vast, low-cost mines to drive out high-cost competitors, they are still bringing on so much supply that the market is awash with iron ore.
Randall did criticise the expansion plans of the major miners, but his view that the spot price is subject to manipulation by traders probably needs more scrutiny.
While iron ore is still in its relative infancy in terms of being an open and transparent traded market, it has progressed rapidly in recent years, with swaps and futures being traded in Singapore and China.
Randall may be reassured that the Chinese authorities also believed in 2012 that iron ore was being manipulated, but they blamed producers for boosting the price artificially by withholding cargoes.
The Chinese, however, were silent when the iron ore price plummeted between July and September that year amid reports of Chinese traders defaulting on cargoes only to buy the same iron ore back later at a lower price.
The point is both producers and buyers often see market manipulation when prices aren’t moving in the direction they want, but it’s very hard to see any sustained effort by any party in distorting the market.
While traders may well be able to influence short-term pricing through market action, trying to achieve this over a longer period usually results in a significant correction, at which point traders positioned the wrong way bleed heavily.
Rather than go backwards to opaque contracts hammered out behind closed doors, the market would be better served by increased transparency, such as deliverable futures contracts, similar to those in oil markets.
It’s also likely that Chinese steel mills wouldn’t accept any return to long-term contracts, and why should they, given they now are in the driving seat.
The move to spot pricing has made iron ore more volatile, and this isn’t always in the best interests of producers or buyers, but it’s still better than the alternative.
It also allows the market, and investors, to see in relative real time the consequences of the major miners’ expansion plans.
To blame Marius Kloppers for ruining iron ore by making it a more open, spot market is off the mark. He, and other iron ore executives, can be blamed for their heroic demand assumptions and hopelessly wrong supply forecasts that have resulted in the wave of iron ore flooding the market.
Editing by Richard Pullin