What put a chill on Australia spot iron ore trade?
SEOUL (Reuters) - Booming spot iron ore freight bookings from Australia to China came to a sudden halt last week, a shift that threatens to up the ante in an increasingly politicized dispute that has cast a cloud over national relations and rattled the world's biggest steelmakers and miners.
While there are sound fundamental reasons for China to cut back on record high imports of the ore used to make steel, and many analysts have for weeks predicted a slowdown, data suggest a disproportionate impact on Australian trade.
Vessel bookings from Australia's main iron ore ports to China have collapsed, but shipments from Brazil -- the other major term exporter -- have surged and Indian spot prices have rallied, factors that imply Chinese demand has not weakened.
Chinese mills are still buying extra iron ore, just not from Australia, their biggest supplier.
"China is on a buying spree and the sentiment is very upbeat...I see prices going up," said a senior source with a major seller in India, which exports spot ore and is potentially the biggest beneficiary of trade friction.
The key question is why: Are Rio and BHP Billiton are holding back supply, possibly due to the unprecedented failure to reach a deal on annual prices by the June 30 deadline or the detention of Rio Tinto employees?
Are Chinese buyers avoiding booking Australian shipments to avoid any appearance of wrong-doing as the probe widens?
Or is this another gambit in the marathon price negotiations, even though neither side had much left to fight for after news on Wednesday that mills had quietly acquiesced to the same 33 percent price cut that other Asian steelmakers clinched in May, giving up hope for a bigger reduction.
Given their close interdependence, all options appeared to be short-sighted, but China's investigation into the domestic steel industry and its negotiations with its top raw material suppliers have pushed the issue deep into uncharted waters.
"China needs Australia and Australia needs China," said Ben Westmore, commodities economist at National Australia Bank. "I am not sure BHP shareholders would be very happy if the company has decided to stop selling its major product to its major customer. It makes no sense."
Either way, the breakdown in incremental spot freight bookings -- an important if smaller part of overall supply -- is likely to put more pressure on both sides to settle the dispute over prices and the arrest last week of four Rio Tinto employees over stealing state secrets about the steel sector.
Some analysts said China seemed the more likely culprit,
"Given what's happening now in the Rio Tinto case in China, clearly China basically is shifting away from Australian supplies to other regions to reduce their reliance on the sole supplier," said an iron ore analyst who declined to be named because of growing industry concerns over the investigation.
But Steel Business Briefing, a Shanghai-based publisher with a record of reporting accurately on the industry, said this week's rise in iron ore spot prices was because "Rio Tinto and BHP Billiton have stopped putting spot shipments up for bid."
A spokesman for Rio Tinto -- which has sold half its ore on a spot basis this year -- said it was "business as usual" with China, but was unable to immediately clarify whether the company had stopped tendering shipments. BHP Billiton had no comment.
FREIGHT BOOKING COLLAPSE
In the first half of July, spot bulk iron ore carrier fixtures from Australia's two main ports fell to just 5 vessels; that's a dramatic slow-down from the record high total 55 vessels in March and an average 40 a month in the second quarter, according to fixtures data from freight broker AXSMarine.
Fixtures from Brazil have surged, marking 25 in just two weeks -- near the record high 29 fixtures in all of April.
For a graphic, please click:
While those ships represent only a fraction of overall imports by China -- which imports the equivalent of about 300 Capesize vessels of ore each month, most of that supplied via long-term charter vessels rather than spot bookings -- it is indicative of a marked change in buying habits just this month.
The Baltic Exchange's Capesize freight index, which tracks costs for vessels hauling 150,000 ton cargoes, hit a seven-week low on Monday, down nearly 33 percent since July 1 due to eased port congestion and the slow-down in Australian trade. Rates have since bounced slightly this week.
Around 85 vessels were waiting to discharge off China's coast, down from 95 to 100 vessels a month ago, according to Will Fray, shipping analyst with London-based consultant MSI.
The drop in freight rates also made longer-haul Brazilian ore a bit more competitive versus Australian cargoes, one potential explanation for China's switch to Latin American supply, although freight costs are still sharply higher than the first five months of the year when shipments from Brazil were much more subdued.
SPOT SURGE
China's imports so far this year have surged 29 percent from a year ago to 297.2 million tons.
Imports reached record highs and inventories swelled as traders rushed to sell cheaper global ore into China, where costly local mines had closed. They bet on a rise in steelmaking and prices as a stimulus-fueled recovery got underway.
The Shanghai Securities News blamed some of that surge on Rio and BHP loading China-bound ships before a buyer was found. In order to pass Chinese customs, a contract with an end-user is needed, but it is not abnormal for trading firms to find that buyer when the ships are already on the water.
Spot market prices, which have risen rallied $5 in just the past few days to around $87 a ton delivered in China, their highest in eight months, according to Metal Bulletin.
Possible Chinese overbuying and heavy port stocks could lead to a lull in shipments going forward, analysts said.
"We are concerned that China's iron ore imports will slow in July, given China's high iron ore inventory, as well as the negative impact from the ongoing mining and steel company investigation in China," said Sarah Liu, a BNP Paribas analyst.
China moved to control these "speculative" imports, which it fears could drive up spot market prices, after it failed to win a price cut bigger than rival Asian mills.
Big mills and trading companies have used the restrictions on smaller importers to sell to small mills at fat margins.
The spread of the investigation to executives at several influential steel mills, all members of lead iron ore negotiator China Iron and Steel Association, could open a rift between CISA and members already impatient at its failure to reach a 2009 price deal with Rio Tinto.
(Additional reporting by Lucy Hornby in Shanghai, Ruchira Singh, Nick Trevethan in Singapore, Jim Regan and Bruce Hextall in Sydney)
(Editing by Clarence Fernandez)
