China, iron ore and how to just be crap at economics and diplomacy

Updating my odd and new-found interest in iron ore: an interesting story by way of the Sydney Morning Herald.

China’s fragmented steel industry is approaching a consensus that it can do nothing to stop BHP Billiton from swallowing Rio Tinto.

A merged BHP and Rio would control close to two-fifths of traded iron ore and almost one-fifth of traded alumina.

China’s steel companies are seen as too small to afford a meaningful stake in Rio Tinto and too parochial to combine their resources effectively.

“It is the most fragmented steel industry in the world – to band them together has proved impossible,” said the Steel Business Briefing spokeswoman.

Many of the largest steelmakers, including Baosteel, Angang and Wugang, say they have no plan to buy Rio shares and they don’t expect to snap up “spare” iron ore assets either because they will be expensive or there won’t be any.

The argument in favour being one of vertical integration (comma, backwards): since China’s steelmakers are in the market for so much of the iron ore, and if Rio Tinto is still non-subtley inviting offers, why not have Chinese companies get control of Rio Tinto? They can

  1. keep iron ore prices down (as they want to do), and
  2. prevent Australian ores from falling into a monopoly (and nothing ruins the fun of monopsony purchasing power faster than monopolies – just ask Wal-Mart).

If BHP can use the merger to save as much money as it’s suggesting, so can PetroChina, surely.

According to the Sydney Morning Herald, though, (a) Chinese firms just can’t get along well enough for to work itself out, and (b):

… the Chinese Government is redoubling efforts to artificially dampen iron ore demand during the secret but all-important contract price negotiations.

The official Xinhua news agency says the Government is prepared to use macro-economic controls to dampen demand as well as steep steel export tariffs.

“It is expected that the spot market for imported iron ore will be greatly influenced by the policy,” said Xinhua.

This would be par for the course, for the Chinese government – but really, can a government be so oblivious to (a) basic economics or (b) basic requirements of getting along with others? I’ve posted several times, with respect to the Yuan, that China will do that which is in her interests, just like any other country will. They have the people, the standing army, the cash, the macroeconomy – is there anything, either stick or carrot, that we have? Not really, no. I’d like to see us try our hand at, say, kicking them out of the WTO: we bloody need them, and they’ve got us right where we wanted to be.

I will, nevertheless, be interested to see the Chinese government employing macroeconomic policy tools in an attempt to suppress their entire macroeconomy in order to dampen the demand for iron ore (that would be the derived demand for iron ore, following the derived demand for steel).

For a start, I must assume it is a bluff: if China could slow their economy down, they’d probably be trying to do so – stable prices kind of make the single-party rule acceptable; not being able to afford food is going to cause a lot of friction.

Secondly, though, perhaps they see a better after-effect. If the Chinese government credibly threatened to play the bench-mark negotiations on this sort of scale, I can’t imagine anything more likely to push Rio Tinto and CVRD into a free market. This would benefit China (assuming it hadn’t, in the process, completely bollocksed-up its economy and pissed off every country in the OECD, WTO, NATO – it’d be a long list).

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