Beijing this week formally ordered Chinese ports to clear excess iron ore stocks that have clogged operations, in a move that may flood the domestic market with cargoes and depress spot prices for miners around the world.
But Western analysts said the move was an attempt to reclaim some influence in hotly-contested iron ore price talks continuing between big Australian miners and Chinese steelmakers.
We are at the pinchpoint for negotiations. If talks are not finalised by the end of June, we will see a lot more material moved to the spot market. This is an attempt to develop some leverage by the Chinese, said Mark Pervan, ANZ Bank's senior commodities analyst.
But iron ore miners are running full tilt and demand is very strong so the power is still in the hands of miners. This last-ditch effort suggests to me that we are getting very close to an outcome, which I think is more likely to favour the miners.
The National Development and Reform Commission (NDRC), China's top economic planning body, said that port authorities were required to submit detailed reports on iron ore stocks, including information about their owners and time of arrival as well as a clearance plan, to the central government by June 20.
Ports should collect fees for excess iron ore stocks and urge clients to move the stocks out as soon as possible, according to a statement on the NDRC Web site (www.ndrc.gov.cn).
Importers, anticipating the order, have scaled-back cargoes of iron ore for China, which combined with a technical correction from record highs and a reduction in bulk mineral cargoes from Western Australia, sent the Baltic Dry Index <.BADI.>, the global freight market benchmark, down 9 percent on Thursday.
We are seeing fewer cargo fixtures and easing of port congestion globally, Credit Suisse analyst Hung Bin Toh wrote in a research note.
China iron ore inventory has started to ease as well, together with seasonally weaker summer, We expect weaker cargo flow and thus lower BDI (Baltic Dry Index) in the coming 2-3 months.
For a graphic showing freight rates, please click on: https://customers.reuters.com/d/graphics/CN_BADI0608.gif
Australian miners argue that lower freight costs for their products should be reflected in higher prices compared to iron ore shipped from Brazil.
Earlier this year, Brazilian miner Val secured price rises of around 70 percent on annual shipments to Chinese buyers for the 2008-2009 contract year.
Toh added iron ore stocks at Chinese ports were at 64 million tonnes at the end of May versus 79 million tonnes in the middle of the same month, when talk of the order began to circulate.
Iron ore import demand could weaken before inventory comes down to normal levels of 40 to 50 million tonnes, Toh said.
Prices for Indian iron ore have fallen 8-11 percent in the past six weeks, as Chinese buying slowed.
The NDRC noted that tightening monetary policy, together with surging prices of iron ore and coke, had cut production by some small steel mills, affecting traders' iron ore sales.
An increase of iron ore stocks at ports has been adding pressure to port operations and railway transportation, and created the illusion that there was booming demand for iron ore in our country, the circular said.
Zou Jian, chairman of the China Metallurgical Mines Association, said the supply surplus in the first four months of the year amounted to 20 million to 25 million tonnes of iron ore and consumption would grow less than 10 percent this year.
He expected the spot price, including cost, insurance and freight, for iron ore to be $110 to $130 per tonne on an average in 2008, higher than the average of $85 in 2007 but lower than prices at the end of 2007. (Writing by Nick Trevethan; additional reporting by Tom Miles in Hong Kong and Luke Pachymuthu in Singapore; Editing by Sambit Mohanty)
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