June 6, 2013 / 9:46 AM / 7 years ago

In commodity pricing, silence and secrecy not limited to oil

* Cash commodity markets are subject to little regulation

* Lack of transparency in iron ore trading draws China’s ire

* Steel body Eurofer thinks index prices can be manipulated

* Potash is one of most secretive, opaque commodity markets

By Manolo Serapio Jr

SINGAPORE, June 6 (Reuters) - A major European probe into the manipulation of global oil prices has raised concerns that could equally resonate across opaque cash markets for a host of raw materials ranging from iron ore to fertilizer.

Benchmarks established by journalists assessing the value of commodities are not unique to oil, and are used in markets for many raw materials to price cash contracts worth billions of dollars a day globally.

Producers, consumers and middlemen in those markets seek prices favourable to their business, and have leeway to be selective about what they reveal to the reporters assessing trade and prices.

Cash commodity markets are subject to little regulation, and companies are not required by law to disclose every trade they execute in the often illiquid markets.

Concern about transparency in oil pricing has triggered European regulators to launch the biggest cross-border trading probe since the Libor interest rate scandal. At stake is whether oil firms colluded to distort prices through trades disclosed to price publisher Platts, a unit of McGraw-Hill Financial .

Other commodity markets have until now avoided the scrutiny regulators are applying to oil, and there is no clear proof that prices in other markets are manipulated. But industry experts say cash markets which like oil rely on data pieced together by reporters rather than machines to establish prices, are also vulnerable to manipulation.

Cash market reporters working for price publishers such as Platts and Metal Bulletin, owned by Euromoney Institutional Investor Plc, maintain contact with traders and brokers to establish the volume and value of daily transactions before assessing and publishing prices. Those prices are subsequently used by buyers and sellers to settle contracts.


Eurofer, the association of European steel producers, says that iron ore index prices are vulnerable to manipulation because of the influence that the world’s biggest mining companies have over supply and trade. Iron ore is the second-largest commodity market by value after oil.

“Without actually saying that they (mining companies) do manipulate them, we do believe that they can be manipulated,” Gordon Moffat, director general of Eurofer, said.

Officials overseeing market competition at the European Commission declined to comment.

China, which buys around 60 percent of the world’s iron ore, has attacked a lack of market transparency and its planning agency has accused “the three major miners” of price manipulation.

The National Development and Reform Commission (NDRC) did not name the miners, but the biggest are Vale, Rio Tinto and BHP Billiton , between them producing roughly two-thirds of the world’s output.

BHP denied the allegations made in March while Rio Tinto and Vale declined to comment.

The NDRC said miners had used a “non-transparent tender process to push up prices”. It did not elaborate, but sources involved in tenders said miners only deal with parties considered creditworthy, giving them power over participation in tenders whose results then influence indexes and prices.

Some Chinese steelmakers say the system gives a few large miners unreasonable influence over prices.

“The indexes are clearly controlled by them (big miners) and it doesn’t accord with the Chinese market,” said Zhang Wuzong, chairman of Shandong Shiheng Special Steel Group.

“The vast majority of Chinese steel firms are raising this question about the indexes. The index price is a typical monopoly price,” Zhang said.

The China Iron and Steel Association began publishing its own pricing index for iron ore in 2011, though it has not gained traction as a benchmark.

While many experts acknowledge the limitations of the existing approach to price reporting, some say there are no better alternative methods available.

“Any system where pricing is agreed within the market based on the prices published in certain publications is open to investigation,” said John Meyer, an analyst at London-based broking and corporate finance firm S.P. Angel.

“A lot of transactions are confidential so it’s difficult to be sure that the price you are told of is correct. It’s a far from perfect system but it’s the only system that the market can agree on. Can the regulators suggest a better system that works in practice?”


Iron ore is priced via spot benchmarks published by Platts and Metal Bulletin. The data providers calculate daily prices based on collected spot transactions for imports, mostly in China.

Thomson Reuters, parent of Reuters news, competes with Platts and Metal Bulletin in providing news and data to various commodity markets, including oil and iron ore.

Spot trades make up about 15-20 percent of the 1-billion-tonne-plus volume of sea-borne iron ore traded globally a year.

Platts polls market participants by telephone, email and instant messaging and in March launched an online platform where buyers and sellers can transact transparently.

“It is not our place to say somebody is not telling us the truth. Our job is absolutely as neutral observers,” Francis Browne, editorial director at Platts, said at an industry conference.

Platts also owns The Steel Index, which compiles transactions submitted by participants through a secure online system.

Platts’ price assessment represents only 6-9 percent of daily spot iron ore transactions in China, said Qian Haifan, general manager at Chinese steelmaker Magang (Group) Holding Co Ltd. He said he would like to see an assessment that captured around 30 percent of those transactions, which would make the price more representative.

One source involved in physical trade said that at least half of the trades that could be considered for assessing prices go unreported. It is unclear what percentage of trades executed are actually reported.

Joe Innace, Platts editorial director for metals, said Magang participated in its price assessment which was open to all Chinese mills and traders in the spot market, but it was up to them whether to join.

“We, as a journalistic enterprise, decide whether or not the information shared on any given day is credible,” Innace said by email.

Another potential difficulty for firms publishing pricing information on commodity markets is a trading activity known as loss-leading, where a company may buy or sell cargoes to influence the reported price. The company may then profit on a larger volume of material priced using the benchmark it has sought to influence.

“If I’ve got 500,000 tonnes of iron ore to sell, I can overpay on another 100,000 tonnes by $5 per tonne to lift the index, because it will allow me to sell my 500,000 tonnes at a higher price,” said another iron ore trader.


The market for fertilizer potash is dominated by a handful of producers, and experts express similar concerns about pricing.

Prices are monitored by publications such as Argus, Fertilizer Week and Fertecon, which communicate with producers, traders and buyers who provide weekly trade prices.

The value of the fertilizer is negotiated behind closed doors, with buyers usually not reporting precise trades and sellers providing nominal prices. Unlike many other commodities, there is no open platform where bids and offers or futures prices can be seen.

The publishers of pricing information say that increased regulation could lead to even more illiquid markets, making their endeavour to establish the value of raw materials traded in opaque markets even harder.

Metal Bulletin Managing Director Raju Daswani feels regulators should push market participants to lift disclosure, rather than impose more regulations on price publishing firms.

“The real role of the regulator should be to encourage participation of companies in the price discovery process which will aid market transparency,” said Daswani.

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