Apr. 23 - The Chinese have launched another attempt to wrest some control of the global iron ore market from the dominant big three miners, but it's likely this latest salvo will fall short of the target.
Beijing is planning new rules to force importers to use a domestic trading platform for the steel-making ingredient rather than one backed by the miners.
China, which buys about two-thirds of the world's seaborne iron ore, will refuse to grant new licences to importers unless they use the China Beijing International Mining Exchange (CBMX) platform, according to a Reuters exclusive story .
This physical trading platform operates in competition to the globalORE system, based in Singapore and backed by the top three producers, Brazil's Vale, and the Australian pair of Rio Tinto and BHP Billiton. The three are also members of the CBMX platform.
Under new rules, traders and steel mills seeking a new licence to import will now have to trade at least 500,000 tonnes of iron ore on the CBMX, a document on the regulations obtained by Reuters showed. Only Chinese firms are eligible for import licences.
If the Chinese platform can grab most of the volume in the market, it will become the benchmark and squeeze the globalORE system, perhaps forcing it to close.
The benefit to the Chinese would presumably be that a platform under their jurisdiction would be where the global miners were forced to come to trade.
Given the Chinese have in the past expressed concern about the market power of the big three, the view would appear to be that if the miners didn't control the physical trade then the pricing would be fairer and more transparent.
China's top economic planner even went so far as to accuse the major mining companies of manipulating the price of iron ore, saying in March they were behind the 83 percent rally in the benchmark Asian spot price between September's three-year low and a peak of $158.90 a tonne in February.
This was an extraordinary accusation by the National Development & Reform Commission, especially since it came without any substance, other than a woolly claim that shipments were held back in order to control supplies and send a fake market signal.
The NDRC appeared to conveniently ignore the fact that the rally in prices coincided with record imports by Chinese steel mills, with the three months from November last year to January 2013 being the strongest on record.
As I wrote in March, there was probably a stronger case to say that iron ore was manipulated weaker when the spot price plunged 42 percent between April and September last year, even as China's imports held up remarkably well considering the weaker economic outlook prevailing at that time.
During the price slump there were reports of Chinese traders defaulting on iron ore cargoes, only to buy them back later at a lower price.
This practice appeared not to concern the NDRC at all, given its silence on the matter.
Thus the latest move to force trade to the CBMX platform should be seen as part of China's ongoing efforts to exert some influence over the iron ore trade.
FUTURES MARKET STILL THE ANSWER
The question is whether it will work, and here the answer is more than likely not in the way the Chinese might hope.
Yes, they may well be able to force more transactions onto the CBMX platform, and that in turn may well increase the transparency of pricing, at least for those party to the transactions if not the market as a whole.
But for as long as the big three miners' output is roughly equal to China's annual imports, the producers are always going to have the power to reduce supply if they feel prices are too low.
It would also appear that since the iron ore platforms don't require actual delivery of contracts, the system is open to manipulation by creating "paper" deals that are cancelled before actual shipment.
It's also likely that the miners will insist on keeping prices tied to existing benchmarks like the Platts index, in which case it could be argued that the platform for executing the trades is irrelevant.
Another key element is confidence in the system, and if any of the parties feel the CBMX platform is being manipulated, they will be extremely reluctant to use it.
This is why the best exchanges and trading systems are ones owned and operated by independent parties whose main interest is ensuring the integrity of the system, as this is the way they attract business.
I, and others, have argued that the best system for iron ore would be a deep and liquid futures markets with deliverable contracts.
But this requires the Chinese authorities to open up their financial systems to all comers, something that seems a long way off, especially since their latest move shows that coercion is still the preferred business model.