Newcastle’s a dirty word in China

Source: John Garnaut, Sydney Morning Herald

COSCO, the world’s biggest shipping line for bulk commodities, yesterday singled out Newcastle’s dysfunctional coal loading systems to explain why iron ore shipping costs have doubled in four months and quadrupled since early last year.

"That’s why in Newcastle there are so many ships; more than 100 vessels waiting for coal," said Yang Shicheng, deputy director of research at the COSCO group. "It is such a bad situation in Australia."

With about one in 20 of the world’s bulk dry commodity ships tied up in a traffic jam at Newcastle on any given day, the average price for hauling ore in a cape-size ship to China has just broken through $US200,000 ($217,000) per day, from an already heated $US100,000 in the middle of the year.

Perversely, Newcastle’s contribution to unprecedented global freight costs has helped lever BHP Billiton into its strongest-ever bargaining position.

Suddenly, it is far more cost effective for Shanghai steel makers to float ore for 10 days over 5000 kilometres from Dampier in Western Australia, than to cart it for 40 days over 20,000 kilometres from Tubarao, Brazil.

He too would like a piece of it: "Collecting this $US30 billion is a marvellous dream."

Traders and conference goers have booked out all 563 rooms at the Shangrila and 626 rooms at the equally extravagant Furama Hotel next door. They are waving mobile phones and openly signing contracts in the foyers and over cups of Chinese tea.

That’s why BHP Billiton is feeling bold enough to effectively boycott
what is being dubbed as the world’s most influential iron ore and steel
conference this week in Dalian, a port city of northern China.

Senior BHP executives say they have no interest in receiving yet
another beating from Chinese officials and companies about their
"irrational" iron ore contract prices.

The China Iron & Steel Association conference at the palatial
Shangrila Hotel, sponsored by Brazil’s CVRD, represents the orthodox,
40-year old benchmark price negotiation system.

BHP, and probably Rio Tinto, would prefer to be wheeling and dealing
with the spot market traders who have packed into the hotel’s three
floors of meeting rooms and cocktail lounges, and who are spilling down
the escalators and out into the street and neighbouring hotels.

These Chinese, Indian, Russian, Kazak and Iranian traders are creaming
the largest windfall profits from China’s steel revolution. China’s
iron ore spot trade is now worth more than the contract trade, said
CVRD’s executive director Jose Carlos Martins.

Siddique, the Shanghai representative for Iran’s Tradeline company, said he is doing a roaring trade but is getting worried about America’s new anti-terrorism financial sanctions. "My worry is we won’t

get paid because the Chinese will have no way to get the money to us," he said.

Ore loaded onto boats in Dampier at $US50 tonne is selling for as much as $US200 a tonne in the corridors of the Shangrila, via a long line of official Chinese and international private traders.

"We are buying ore at $US175 a tonne and selling it for $US180, or $US200 for 64 per cent grade," says Lin Mengzhao, from the private General Nice (Tianjin) Industry Co.

Many small steel makers, traders, and indeed Australian mining executives reserve their harshest words for the state-owned trading house SinoSteel, which owns a large stake of the Australian Channar iron ore mine and frequently berates Australian companies for charging high prices.

"There’s a lot of Chinese scum-of-the-earth traders who are sending the price sky-high," said Fan Yu, who owns a mid-sized trading house in the heart of China’s steel country, called Tangshan Mingzhu Trading Co. "SinoSteel get their iron ore contracts very cheap and they sell it themselves," he says.

Devdat Jai, the Shanghai representative for India’s Psons Ltd, has sold 1.5 million tonnes of high-cost Indian ore this year about 10 times the profit margins of last year.

He says BHP and Rio are in the wrong game. "Long term contracts were good two years ago, but today the spot price is rising every day," he says. "They should change their policies and sell 50 per cent on the spot market."

Wang Xinhe, from the Tianjin Dragon Peak Iron Trading company, did not know Australian miners only received about a quarter of the top prices he is now paying. "Your iron ore is the most expensive, but it’s also the best," he said.

The Chinese steel industry is divided into the large and usually state-owned factories that get cheap, high quality ore from Australia and Brazil and the rest. The smaller operators are forced to brave the vagaries of the spot market.

"In Tangshan there are 22 blast furnaces, and the more they produce the more they lose," says Fan Yu.