subject: Benchmark system dictates iron ore price posted: Sun, 11 Jun 2006 13:44:41 +0100
[This might seem dry but its far from it, multiple gems inside -
Martins' weaseling through the cartel accusations are amusing enough,
but there's also some candid insights into some seriously big
business, Martins' take on "organic grow", and a thus-far-overlooked
(geddit?) aspect of Google Earth - everyone knows it can be used to
look at military bases but the use of it for competitive intelligence
- in this case, inspecting your competitors' stock holdings - has not
so far made the news, as far as I know. Though I did find this blog
entry:
Google Earth and Manufacturing Competitive Intelligence
Manufacturers are always trying to figure out what their competition
is up to. Usually this includes such tasks as scouring trade
journals, patent searches, and sneaking around their booths at
conferences. In more extreme cases we can wander around unsecured
buildings, dive into dumpsters for trash that should have been
shredded, or sit across the street watching delivery and shipment
activity.
Google has given us another tool: Google Earth. This is the result
of their acquisition of Keyhole, which provided high resolution
satellite images of almost any point on the globe. Google has taken
the technology and data, made it free, and streamlined the user
interface so it can be used on almost any computer. You'll need a
computer that's less than about two years old, and a broadband
connection.
Type in the address of your competitor's plant, and you'll feel like
you're flying across the globe then nosediving to about a thousand
feet over the facility. Zoom in, zoom out, scour the surrounding
neighborhood. Maybe they're in the process of building an addition!
The data is relatively current, and there is an ongoing updating
process.
ALAN KOHLER: One of the more curious rituals in commodity markets is
the annual negotiation of iron ore prices. Each year BHP Billiton,
Rio Tinto and the biggest iron ore producer, Brazil's CVRD, sit down
separately with the key steel makers across the world and hammer out
new prices. And remarkably, they come up with the same price. Last
year it was 71.5 per cent increase across the board. This year it's
19 per cent. I spoke to the head of CVRD's iron ore division, Jose
Carlos Martins, after a speech to the Melbourne Mining Club this
week. Jose Carlos Martins, we have three dominant producers in the
world of iron ore. Is it like OPEC now?
JOSE CARLOS MARTINS, EXECUTIVE DIRECTOR OF FERROUS MINERALS, CVRD:
Far from it. OPEC is something built by governments. We are market -
have nothing to do with governments.
ALAN KOHLER: It seems to be a cartel?
JOSE CARLOS MARTINS: Far from it. There is a lot of competition in
the market, a lot of players.
ALAN KOHLER: So how come it's exactly the same price rise for all the
producers each year?
JOSE CARLOS MARTINS: It's because there is a system in place which is
called the benchmark system. Normally one player fix a price with one
customer and this price spreads all over the market. It's a way a lot
of other products' prices is established. Even in the steel industry,
the price is established rather in this way.
ALAN KOHLER: But if there's competition between the iron ore
producers, why is there no price competition? Why don't you undercut
BHP and Rio Tinto?
JOSE CARLOS MARTINS: You have costs to cover. Mining is a very
complicated industry. When you increase production, for instance,
price goes up. This is an industry where you don't have economies of
scale. Nowdays, for instance, to increase production to supply
customers, we are operating with higher costs. It's a completely
different system than other industries.
ALAN KOHLER: Do you have meetings with your competitors?
JOSE CARLOS MARTINS: No.
ALAN KOHLER: So how is the benchmark price conveyed to them?
JOSE CARLOS MARTINS: I don't know. I don't know. You have to ask
them. What I think - it's the benchmark price conveyed to our
customers. We set the price with our customers. Our customers accept
the price. Our competitors - I don't care. It's their decision. What
is important for us is our customer accept our price. The consequence
of it is a marketing decision that our competitors have to take a
decision for themselves.
ALAN KOHLER: So 71.5 per cent last year. 19 per cent this year. How
do you justify almost doubling the price of iron ore in two years?
JOSE CARLOS MARTINS: Have you looked at the price of oil? Have you
looked at price of aluminium? Have you looked at price of copper? Who
are you going to blame? In case of iron ore, it's face-to-face
discussions. We don't hide behind the LME. We don't hide behind
anything. We discuss with our customers is a face-to-face
negotiation. We go to our esteemed customer and discuss the price we
need. So we have no trading companies in middle of us. We don't have
scalpers. We don't have speculators in middle of us. Hedge funds
buying in the market, raising the prices artificially. So it's the
best way to negotiate. But there is some side effects is that we are
exposed because we have to go there and ask 71.5 per cent increase
and it hurts.
ALAN KOHLER: It's more personal isn't it?
JOSE CARLOS MARTINS: Yes, it's personal. It hurts but it's the best
way of doing things. Our customers have the right to be not happy
with that but we are going to invest, we are going to supply more,
they have the material they need.
ALAN KOHLER: Can you give us some indication of how those face-to-
face negotiations play out. Do people get angry? Do you storm out and
slam doors or is it polite? How does it work?
JOSE CARLOS MARTINS: This is very interesting because these
negotiations are there for more than 30 years, OK? I'm in the
business for two years and the system is there much years before I
arrive and it's high-level negotiation. People discuss numbers,
analyse the market. There is a lot of information around. Months and
months of discussions. Normally discussions last two or three months.
Different customers, different competitors. Everybody talking to find
out what would be the best price for the market situation at that
time and trust is very important because a customer has to understand
that that price is good for him. He is paying a fair price that he
will get more supply back. He will get more investment, more quality,
more service. I think the benchmark system is based on confidence, is
based on trust, is based on long-term relationship and iron ore
makers, iron ore producers, they don't have anything else to sell
iron ore besides steel makers, so this is our fate. We need to sell
our product to the steel makers.
ALAN KOHLER: Obviously this time around, unlike the Japanese and
European and Korean steel makers, the Chinese don't think that the 19
per cent increase is good for them. To what extent has that to do
with the Chinese Government or the steel mills in China?
JOSE CARLOS MARTINS: I think China is in a process of learning. They
are becoming a market-oriented economy and the learning process is a
very difficult process. They have been accepting the system. We sell
to China several years so they have been accepting the benchmark
system all of this year. This year, they would like to be the price
setters but the process is very dynamic. We have six, seven people
all over the world negotiating with various customers. I never know
with whom the price will be fixed and the system in China was a
little bit not so fast. They had to caucus between them several
times, the Chinese steel makers, each one have a different situation.
ALAN KOHLER: Do you think they'll ever get to the point where they'll
be big enough to be the price setters in China?
JOSE CARLOS MARTINS: Yes, I think they deserve it by the size they
have. I think they deserve. I think they will, but they need to be
faster in their decision making process.
ALAN KOHLER: Will that be next year, do you think?
JOSE CARLOS MARTINS: Maybe. But one thing is for sure, they need to
be more... Their perception has to be more related to the world
market because iron ore is a global market, it's not only China, it's
global. So they have to adapt their perception, not only to the
Chinese market, but the whole market and they have to be faster in
their decision making process. Will you be looking for another price
rise next year? I don't know. It's too early to say. I don't know.
It's too early to say. Too early to say.
ALAN KOHLER: Do you think it will be difficult to get next year?
JOSE CARLOS MARTINS: Markets will say.
ALAN KOHLER: In these negotiations lately, did China try to pick you
off against each other? BHP, Rio and CVRD?
JOSE CARLOS MARTINS: Probably they tried to make the best business
for them. I think it's fair. In our discussions, in our negotiations,
it's fair that the customer looks for a better price for him so it's
market and you have to accept it but there is a strong situation
which is the market condition. We have been running out of iron ore
this year. No inventories, difficult just to supply. There is no iron
ore. We have much more demand than the iron ore we can produce. This
is the reality, so when you have a situation like that, it's quite
impossible to play one supplier against the other because the reality
is there. You look at the stock in the yards, you don't see any, any
iron ore and nowadays with the Google Earth, all of these things, you
are able to see how much stock everybody has.
ALAN KOHLER: You have small operations in Australia. Do you intend to
grow your businesses in Australia, perhaps in other things than iron
ore? Maybe in nickel or manganese, coking coal?
JOSE CARLOS MARTINS: Definitely, Australia is a country that is a
mining country, it's a very good environment for business. It's a low
risk country, a lot of opportunities, and I think a lot of technology
in mining around and CVRD is a little bit late on this so we opened
up our office here last year for coal exploration mainly, but we
intend it to grow for other businesses.
ALAN KOHLER: Would you expand in Australia by takeovers?
JOSE CARLOS MARTINS: Our strategies mainly by greenfield operations,
OK. Organic grow, but if the opportunities appear, why not?
ALAN KOHLER: Greenfields takes a long time.
JOSE CARLOS MARTINS: Yes, but nowadays, to buy assets is very
expensive so greenfield takes time but it's solid. You pay reasonable
price for it and you built it brick by brick but if the opportunity
appears, we will consider.
ALAN KOHLER: And finally, do you think the Australian football team
can beat Brazil at the World Cup in Germany?
JOSE CARLOS MARTINS: It would be very difficult. It would be very
difficult. It would be very difficult. I think Brazil team is better
prepared for it but Australia team play very tough but for sure, we
are going to cheer for Australia, as long as we beat them.
ALAN KOHLER: We'll leave it there. Thanks very much for joining us,
Signor Martins.
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