Vale denies iron ore price fixing accusations

The Business of Mining - thebusinessofmining.com | June 2, 2010 | 10:42 am

“Vale, the Brazilian iron ore miner, yesterday defended itself against Chinese accusations that its iron ore prices are too high, saying that supply and demand are fixing prices, not the big iron ore miners.

Roger Agnelli, Vale chief executive, told a press conference in Shanghai: ‘Vale is not fixing prices: who is fixing the prices is the market.

Steelmakers and Chinese officials have repeatedly complained about the concentration of power in the world iron ore market in the hands of three big producers, which also include Rio Tinto and BHP Billiton.

The dispute has ramifications for the global economy as iron ore prices feed through to steel prices, impacting the price of every-day goods.

Steelmakers were forced to accept a 90-100 per cent increase in iron ore prices in the second quarter after the annual benchmark system of pricing broke down.”

Source: Financial Times, June 2 2010

Observations:

  • Vale, Rio Tinto and BHP Billiton produce approx. 2/3 of exported (seaborne) iron ore. Vale is the largest of the 3 with 28% (240 m tonnes) of total exports.
  • Demand for iron ore is rather inelastic to price changes. Steel makers are generally willing and able to pass on price increases to end consumers.

Implications:

  • Due to the nature of the iron ore industry (homogeneous product, oligopolistic structure, strong ties among players) the threat of cartel forming is ever present. BHP Billiton, Rio Tinto and Vale will therefore need to be very carefull in their actions and will always need to be prepared to explain what they are doing.
  • Not only explicit price fixing (price levels agreed among producers), but also implicit price fixing (producers all understand it is in their best interest to keep price levels high and act on it) is punishable. It is certainly possible that a competition authority will find the iron ore producers guilty of implicit cartel forming.

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