REFILE-UPDATE 4-BHP responds to China claim of iron ore price manipulation

Thu Mar 7, 2013 4:17am EST

* China accuses mega miners of holding back cargoes to boost prices

* BHP says sells large volumes on spot market

* Fortescue says price volatility hurts all

* Platts says iron ore index reflects supply, demand

By Sonali Paul and Manolo Serapio Jr

MELBOURNE/SINGAPORE, March 7 (Reuters) - BHP Billiton said on Thursday it was committed to a transparent iron ore market, responding to allegations by top consumer China that global miners had manipulated the market to drive an 80 percent jump in prices over the past six months.

China's national planning agency said on Wednesday the world's top three miners and some traders had delayed shipments and held back stocks "to send a fake market signal that there was a supply shortage".

The National Development and Reform Commission (NDRC) did not name any miners, but the top three iron ore producers are BHP, fellow Australian miner Rio Tinto and Vale of Brazil, between them producing roughly two-thirds of the world's output.

BHP, the world's third-largest iron ore miner, said it had produced iron ore at full capacity between July and December 2012 and sold all of that material.

"We aim to improve transparency by increasing liquidity in the spot market," BHP said in a statement e-mailed to Reuters.

"We sell significant volumes on a spot basis, including through widely accessible trading platforms, irrespective of the iron ore price," it said.

BHP was the first of the iron ore giants to issue a response to the statement from the NDRC, which came just as iron ore prices have eased off 16-month highs. Vale and Rio Tinto declined to comment.

As the world's biggest importer of iron ore, taking about two-thirds of globally traded material, China has little choice but to buy heavily from the big three producers. Its iron ore imports soared to 70.94 million tonnes in December, taking purchases to an all-time high of 743.6 million tonnes in 2012.

VOLATILE MARKET

Spot market trades are used to set iron ore index prices, which producers and steel mills in turn use as benchmarks for pricing monthly and quarterly supply contracts.

"It's more the art of war than manipulation," said a commodities analyst familiar with the way Australian iron ore miners price cargoes to China.

"Both sides use the pricing mechanism to their advantage and it's a big money game. If you can extract another 10 dollars per tonne out of your ore, that's a significant margin to make."

The spot iron ore price nearly doubled from three-year lows in September to reach a 16-month high of $158.90 a tonne in early February. The price stood at $145.80 on Wednesday.

World no.4 iron ore miner Fortescue Metals Group, which calls itself a price follower and prices its sales off the indexes, appeared to back the Chinese view that the market was not necessarily transparent.

"The current volatility is not good for suppliers or customers, and we think ultimately the price needs to be a true and transparent reflection of the supply demand balance," Fortescue said in a statement e-mailed to Reuters.

BALANCING THE BOOKS

In response to the planning agency's specific allegation that some miners were buying iron ore cargoes on the spot market in order to lift prices of the key steelmaking material, BHP said it was "very normal" for steel mills, traders and producers "to both buy and sell cargo to balance their books".

"Such transactions occurring on the platforms is to the benefit of all market participants in that it supports transparent market pricing and market liquidity," BHP said.

BHP bought 100,000 tonnes of iron ore in January in a rare move that market participants saw as a strategy by producers to stem a decline in prices.

"We will not comment on what transaction we have or have not done," the company said on Thursday.

China's NDRC also said miners had used a "non-transparent tender process to push up prices", referring to iron ore cargo sales conducted through tenders whose results then influence world iron ore indexes, such as the Platts iron ore index.

Platts responded that its index is an accurate reflection of the market.

"We are confident that our published prices reflect the reality of current supply and demand conditions in the iron ore spot market," said Keith Tan, managing editor for steel raw materials at Platts.

"Iron ore prices have rebounded earlier this year mainly owing to improved manufacturing activity in China, low inventories held by steelmakers, and reduced domestic output during winter," he said.

The attack from the NDRC comes at a time when steelmakers in China, the world's largest iron ore importer, are booking losses as steel demand has fallen and raw material costs have surged.

BHP and Rio Tinto shares were flat on Thursday in a slightly weaker broader market.