Fortescue breaks ranks to join Chinese spot market

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Fortescue breaks ranks to join Chinese spot market

By Peter Cai

The battle between the Chinese steel mills and Australian miners over iron ore pricing has taken an interesting twist with Fortescue Metals joining the Beijing-backed trading platform.

China has recently launched a new iron ore trading platform in an effort to exert greater influence over international prices for the key commodity.

The new Chinese platform will be pitched against the BHP Billiton-backed Global Ore market, which is based in Singapore.

Caijing, a Chinese financial publication, cited an iron ore specialist at Umetal consultants as saying Fortescue is trying to find new customers for its expanded production.

"Fortescue is not a diversified mineral producer and it only focuses on iron ore," said the consultant Zhang Jiabing. "Its decision to join the platform can be regarded as part of its China marketing strategy.”

BusinessDay understands that Fortescue, Australian's third-biggest iron ore miner, is the first major non-Chinese customer for the Beijing-based trading platform.

It is a significant first step for the Chinese venture to be accepted as an internationally recognised exchange.

“It’s significant that Fortescue is the first major seaborne iron ore supplier to join China’s new trading platform,” said Fortescue Chief Executive Officer Nev Power in a media statement.

“It underscores Fortescue’s close relationship with our Chinese customers and our emergence as an alternative, reliable supplier of iron ore to the world’s largest consumer. We strongly believe a transparent iron ore trading platform is in the long term interest of iron ore suppliers, steel mills and traders.”

Long-running dispute

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The competition for customers between these two rival platforms is the latest chapter in the long-running dispute between world's largest iron ore customer, China and its largest suppliers, BHP and Rio Tinto.

The Beijing-based trading platform is backed by 26 major Chinese steel mills and traders including Baosteel, Wuhan Iron and Steel, China Minmetals and Sinosteel. Singapore based Global Ore is largely backed by international miners led by BHP.

The vice-president of China Iron and Steel Association, Wang Xiaoqi told Chinese steel mills not to join the BHP-backed platform: "We are still studying the platform [Global Ore]. Chinese steel mills can approach and communicate with it now, but shouldn't join it as members."

After the collapse of the long-term annual benchmark price, BHP's CEO Marius Kloppers has been championing a move towards a spot market for iron ore.

BHP's strategy has been successful and it now sells most of its iron ore at the shorter-term market-based price and the launch of the new platforms signals the beginning of the age of spot prices dominating the industry.

Fortescue is expected to triple its production of iron ore by 2013 to 155 million tonnes. It has an expansion budget of $US8.4 billion.

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