A new report from Europe reveals stabilising global freight costs could end Rio Tinto and BHP Billiton’s dominance over supply of iron ore to the Asian markets.
The reports from the European think tanks Centre for European Policy Studies and the European Capital Markets Institute said the global freight sector is transforming, and could affect the companies’ command over iron ore supply to Asia.
Mining giants Rio Tinto, BHP Billiton and Vale have 65 per cent dominance over the world’s seaborne iron ore market.
The report’s analysis of the global commodities supply chain found the companies can sway the iron ore price by choosing to produce specific quantities of mineral at each time, based on what their competitors are doing.
The report said the miners have “first-mover advantage” in areas of their operation.
“[An] oligopolistic setting is often influenced by external factors, such as freight industry capacity and easier (cheaper) connectivity between regional areas,” the report said.
“Freight costs are an important part of the seaborne iron ore price and can expose the market to unprecedented volatile patterns. Recent changes with the increase in capacity of the freight industry have stabilised costs of freight for some time and ensure easy connectivity at the global level.
“This may increase the accessibility of new regional areas to the global market and reduce space for an oligopolistic setting as marginal costs become less predictable.”
According to the SMH, the report will be welcome relief for small miners such as Fortescue Metals Group as steady freight costs could mean they can consent to prices that will not yield profit to gain contracts in Asia.
This could increase competition as it steers the market away from its current “oligopolistic equilibrium”.
The report also said global investment banks such as Goldman Sachs and JP Morgan have been operating global commodity warehouses connect to the London Metal Exchange.
It said the value of aluminium kept in the warehouses in America has unnaturally inflated by excessive demand to extract the aluminium.
A report by the New York Times recently said Goldman Sachs had been manipulating the LME’s industry pricing regulations by rearranging aluminium between the 27 warehouses it runs in Detroit.
“The manoeuvre lengthens storage times and generates millions a year in profit for Goldman, which charges rent to store the metal for customers,” the Times said.
The European report said global market players could lose access to an important hedging tool. It could also drive up the cost of aluminium for the end user.
“[It] could ultimately end up affecting the price formation of LME aluminium cash contract as a global benchmark price,” the report said.
BHP Billiton recently sold a 15 per cent stake in its Australian Jimblebar iron ore mine to two Japanese trading firms.
The deal came in an effort to align Itochu and Mitsui’s interests across BHP’s Pilbara iron ore operations so assets can function in a simple way.