Commodity Corner

Views on commodities and energy

Did Rio turn the iron ore tables?

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 Global miner Rio Tinto said it had an excellent relationship with Chinalco, despite a decision to scrap a proposed $19.5 billion tie up with the Chinese firm on Friday.
    The failed link up between China’s Chinalco and Rio Tinto in Australia was thought by many observers to be at least partly due to shareholders’ fears that Chinalco was trying to increase its leverage in iron ore deals with Rio.
    Now that the tables have turned, and Rio announced a proposed iron ore joint venture with BHP Billiton in Western Australia the Aussies could get the upper hand in determining prices in negotiations with Chinese steel makers, analysts said.
    If the deal goes through, Damien Ma, political risk analyst for Eurasia Group said BHP and Rio would supply roughly 3/4 of China’s iron ore. “That’s enormous.”
    The deal comes amid very contentious iron ore negotitions with the price down sharply in the last six months.
    The Australians’ proximity to China, and therefore greatly lower freight costs, and the significant operating cost reductions from the planned joint venture would certainly give Brazil’s VALE, the world’s largest iron ore producer, “some competitive issues,” as one analyst put it.
    If Rio and BHP  are able to meaningfully reduce their operating costs at a time when they are already competitively advantaged by the proximity to China and the rest of Asia, analysts said it could force VALE to lower their iron ore prices to remain competitive.