Big Three Iron Producers Get Their Terms With China (RIO, RTP, BHP)

China made it very clear that it does not want to pay higher prices for iron ore after enduring price increases of over 70% last year. Bold statements about “huge and unreasonable profits” and “unacceptable prices” preceded the annual price negotiations. Recently, German and Japanese mills agreed to an increase of 19%, which set a de facto global benchmark price.

To understand the iron ore market you need to realize that the “Big 3” control approximately 70% of the world's iron ore production and they are unlikely to sell their product at a discount while demand is so high. Who are the Big 3?

* Companhia Vale do Rio Doce - CVRD (RIO)
* Rio Tinto (RTP)
* BHP Billiton (BHP)

Here is how their recent negotiations have gone:

* CVRD, which is the world's biggest iron ore producer, has agreed to a 19 per cent increase in contract prices for iron ore fines with German steelmaker ThyssenKrupp AG.
* BHP Billiton, the world’s largest miner, has agreed to iron-ore price increases of 19% with customers in Asia and Europe, matching increases by rival producers.
* Global miner Rio Tinto has secured a 19 per cent increase in the contract price for lump iron ore from South Korean steelmaker POSCO

Bonnie Liu, a steel analyst at Macquarie Securities, summed it up best: "There is little hope left for the Chinese side... there are only two options left -- they either take it or leave it."

Today’s Reuters dispatch indicates that Chinese steel mills made their decision:

Chinese steel mills have decided to accept a 19 percent price hike for iron ore, putting an end to months of negotiations with the world's top miners, including Brazil's CVRD, industry sources said late on Monday.

We can expect Chinese capital to flow into iron ore projects as they attempt to increase supply options. Nobody enjoys negotiating with a gun to their head.