BHP Rebuffs China Claim of Manipulation in Iron-Ore Price

BHP Billiton Ltd., the world’s largest mining company, rebuffed claims by China that the biggest suppliers of iron ore have manipulated prices of the raw material used to make steel.

A recent surge in iron-ore prices was caused by changes in demand, market speculation and “unreasonable” pricing methods, China’s top planning body said. BHP seeks to “improve transparency by increasing liquidity in the spot market,” the Melbourne-based company said today in response.

The dispute harks back to tensions between suppliers and China, the biggest buyer of iron ore, when prices were set annually. The yearly price-setting negotiations, a practice in place for more than four decades, largely ceased in 2010 when the industry moved toward shorter-term contracts. The China Iron and Steel Association asked the nation’s steelmakers in September not to participate in iron-ore auctions by BHP, Rio Tinto Group and Vale SA, saying they weren’t transparent.

Chinese steelmakers re-stocked ore during the traditional “winter reserve” period and ramped up purchases as confidence in the economy improved, leading to an explosive increase in demand in the short term, the National Development and Reform Commission said in a statement on its website yesterday.

“This is 600 Chinese mills versus 1,500-plus miners and the market is actually very liquid,” Melinda Moore, a bulk-commodities analyst at Standard Bank Plc in London, said by phone. “I don’t expect it to have an impact on price. It’s hard to know what the NDRC are trying to achieve with this because markets work as markets work.”

False Impression

The three largest mining companies and certain traders either delayed or controlled deliveries to make up for their previous losses, creating a false impression of temporary short supply, according to the NDRC. Some mining companies also bought iron ore from the market to drive up prices, it said.

The peak of tensions between China and mining companies was marked by the 2010 arrest of Stern Hu, Rio Tinto’s head of iron ore in the country. He was jailed for 10 years for taking bribes and espionage and three of his Chinese colleagues were given sentences as long as 14 years.

The case also led to a 2010 probe by the Chinese commerce ministry’s antitrust bureau into whether BHP, Vale and Rio, the three-biggest exporters, were monopolizing supplies.

China has sought to curb its reliance on the three producers, which account for about 75 percent of global trade, by boosting foreign investment in alternative suppliers and new mines. The iron and steel association said in 2010 it was seeking to cut its reliance on foreign companies to just one-third of requirements by 2015.

Record Volumes

BHP, the third-largest iron ore exporter, said it produced record volumes of iron ore in the second half of 2012, all of which it sold and delivered to the market. It posted sales of $22.6 billion from its iron ore unit last year.

“We sell significant volumes on a spot basis, including through widely accessible trading platforms, irrespective of the iron ore price,” BHP said today.

The NDRC said major mining companies based long-term contract prices on “opaque” bidding, pushing prices up even as a very small amount of ore was traded, according to the statement. It didn’t name any producers.

Some commodity prices gained from the second half of last year “as sentiment improved and economic growth accelerated,” BHP said when it reported first-half earnings Feb. 20. “The iron ore market was affected by this change in sentiment and prices responded following a deep inventory cycle in China that temporarily disrupted the supply-demand balance.”.

‘Very Normal’

Vale, the biggest iron-ore producer, declined to comment on the NDRC statement in an e-mailed reply to questions. A London-based official for Rio Tinto Group, the second-largest exporter, declined to comment.

BHP said it was “very normal” for steel mills, traders and producers to both buy and sell cargo to balance their books. “This is also the case on both the Beijing and Singapore platforms,” it said. “Such transactions occurring on the platforms is to the benefit of all market participants in that it supports transparent market pricing and market liquidity.”

China imported 70.9 million metric tons of iron ore in December, a record for a single month, the planning body said. There was a “meaningful improvement” in iron ore demand from steel mills in China, Japan and Europe, Macquarie Group Ltd. analysts wrote in a Feb. 22 report.

Iron ore is poised to decline over the rest of the year as global supply increases and a rally spurred by restocking in China ends, according to Morgan Stanley.

Prices Peaked?

The price probably peaked at about $159 a ton last month and will average $129 over the rest of the year, analysts Joel Crane and Peter Richardson said in a report today. The raw material may average $133 a ton over 2013, with prices seen dropping to $130 in the fourth quarter from $142 in the first, they said.

Iron ore has rallied 68 percent since September as economic growth in China accelerated and port inventories in the biggest buyer slumped to a three-year low. Morgan Stanley joins analysts from Deutsche Bank AG to Bank of America Corp. forecasting lower prices. Global seaborne supply will gain 9.1 percent this year, topping an 8.3 percent rise in demand, Morgan Stanley estimates.

Iron ore with 62 percent content delivered to the Chinese port of Tianjin rose 0.4 percent to $145.80 a dry ton yesterday, according to data from The Steel Index Ltd. The global benchmark reached $158.90 on Feb. 20, the most expensive since Oct. 13, 2011. It bottomed at $86.70 on Sept. 5.

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