This weekend you could not miss it: Some newspapers were saying the Chinese would pay a freight premium (see the story at the Australian), and some newspapers were saying that the Chinese would not (see the story at Reuters). The fact is the spot market does not help anyone. It hurts the Chinese on the reliability of ore deliveries, and it hurts the Aussies on the stability of earnings. The fact is spot market commodities go down as quickly as they go up. Look at the dry bulk index for example, or nickel. The strength of the oligopoly, soon to be the duopoly, in iron ore is the complete pricing structure that the annual pricing mating dance provides.
So the question is what can BHP/Rio Tinto do in this market, and the answer is just wait for the Chinese to save face and then do not expect to capture 100% of the freight differential between the Aussies and the Brazilians. The fact is at this point the old Euro-centric iron ore market is no longer the focus of the whole marketplace. The new focus is the Asian market, and the sub-focus is China. In that context, a change in the relative values of the Brazilian and Australian ores is a rational thing. This means that the old price equality will go out, but I doubt that BHP or Rio Tinto is stupid enough to go to a 100% spot market. So give it time and expect a middle ground where both BHP and the Chinese can save face, but there will be long-term contract with a different relative value between Australian and Brazilian ore. By the way, I doubt that Rio Tinto will settle first: They cannot afford to be first mover as they are acquisition bait to BHP. The best they can do is stand back and let the fight happen, and if BHP messes up, then they might have some room to fight BHP with.
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