By Kishori Krishnan Exclusive To Iron Investing News ^{[1] [2]}

The China Iron and Steel Association, which regulates the iron and steel industry, has cracked the whip. Teaming up with the Ministry of Commerce, the duo have begun a joint investigation into the issue of illegal speculative purchasing. This could lead to the cancellation of iron ore import licenses for more than 20 companies.

Speculative purchasing is the buying of commodities like iron ore in order to resell them later when prices have increased, rather than selling them at market prices for internal consumption. It often inflates the price of a particular commodity because it artificially increases the demand for it.

Commodity prices, including iron ore, plunged in the second half of last year as the U.S., European and Japanese economies slid into recession. Car makers, consumer-goods manufacturers and builders have cut orders for steel, weighing on iron-ore demand.

Most of the 20 firms are distributors. Currently, 112 steel mills and distributors have iron ore import licenses. "Large state-owned enterprises may not have trouble but those small private enterprises may be among those being disqualified," said an insider.

Four employees of the Australian iron ore supplier Rio Tinto ^[3] were detained on July 5 in Shanghai on charges of espionage, and some executives at Chinese steel mills, suspected of involvement in the case, are also under investigation.

While the global steel industry is riveted to the intrigue surrounding Rio Tinto and its iron ore negotiations with China, miner BHP Billiton ^[4]is quietly pushing its own index pricing agenda with bedrock Asian customers.

In its latest attempt to break down the decades-old benchmark system, BHP gave customers in Japan and South Korea a choice: pay up for iron ore supplies that were ordered but not delivered last year, or write off unsold volumes and switch the contract to prices based on market-based indices. As a result, at least some customers have been unable to finalize new contracts for the April to March 2010 period.

"An annual iron ore deal with BHP hasn't been agreed yet due to differences over how to settle carry-over amounts but we expect to conclude negotiations this month," Kwon Young-tae, executive vice president of raw material procurement at the world's No. 6 mill, POSCO ^[5], told reporters on Monday. "We hope to agree on prices with BHP at a similar level that we have already signed with Rio Tinto," he added.

Under iron ore contracts that normally span a decade, mills and miners agree at the start of each year how many tons of ore will be sold; in the previous 2008/09 period, however, many mills ultimately took far less than agreed due to the collapse in demand that forced some to cut production by as much as half.

BHP now says they must agree to fulfill their previous contract purchases - at last year's record-high prices - before moving on to this year's supplies, which are some $30 cheaper per ton, unless they are willing to change the terms to spot price indices. For the moment there seems little doubt that the traditional buyers - more conservative than their Western or Chinese peers and fearful of ceding more control to three miners that own 70 per cent of the world's traded ores - will choose to pay up for old tonnage rather than abandon the fixed price mechanism, but BHP's move underscores the growing pressure on the benchmark.

BHP, the world's No.3 iron ore miner after Vale ^[6] and Rio Tinto, has yet to decide which iron ore indices it wants to use for pricing and is open to discussing it with Asian customers. A spokesman for Japan's Nippon Steel ^[7] said on Tuesday it has yet to complete a formal agreement with BHP on the 2009 term price, although sources said they have basically agreed with BHP already by settling carryover issues.

Its smaller rival JFE, which market sources say had little carryover volume from last year's pricey contract, is the only major Asian mill that has officially signed a 2009 deal with BHP.

Baosteel ups price

China's Baosteel (600019.SS) will raise prices of its major steel products by 9 to 13 per cent next month, more than expected, a move that may suggest mills have effectively given up their battle for lower iron ore prices. Baoshan Iron and Steel Co Ltd ^[8], the listed unit of China's largest steel mill, will increase hot- and cold-rolled steel products by 9 to 13 per cent compared to July, trade sources said, double expectations and the biggest one-off increase since Baosteel moved from quarterly to monthly prices last May.

For those following every twist and turn in this year's marathon negotiations over annual iron ore prices, the main input cost for mills, the latest deal appeared to be an effort to pass along higher-than-expected costs to its customers.

"I think it could mean that Baosteel has agreed to follow the price cut that Rio Tinto and Japanese steel mills signed," said Cui Jingyi, analyst at Guotai & Junan Securities. Rio (RIO.AX) (RIO.L) in May agreed to a 33 per cent cut in its annual selling price to most of its major Asian customers outside China, but China's mills have been arguing for a return to 2007 prices, implying a cut of at least 40 per cent on purchases from Rio, BHP Billiton (BHP.AX) (BLT.L) and Vale (VALE5.SA).

Kumba iron ore

Anglo American Plc's Kumba Iron Ore Ltd. unit, the largest African producer of the steel making ingredient, said profit for the six months through June will climb as much as 22 per cent. Headline earnings will be between 3.35 billion rand (US$ 404 million) and 3.45 billion rand, while earnings per share will be between 10.50 rand and 10.85 rand, Pretoria-based Kumba said in a statement to the Johannesburg's stock exchange.

That compares with earnings of 2.82 billion rand, or 8.90 rand per share, a year earlier, the company said. Kumba's earnings forecast is "not great," said Andrew Joannou, a fund manager at Renaissance Specialist Fund Managers. Iron ore sales prices may have been lower than expected and costs higher, he said.

Striking workers

Workers at Shougang Hierro Peru ^[9] (SHP.LM) went on strike for higher wages on Monday and a company official said work at the iron ore mine was halted. Shougang Hierro Peru, a unit of the Shougang Group of China (SGANG.UL), churned out some 5.2 million tonnes of iron ore last year and is Peru's only iron producer.

"Shougang has the capacity to raise our salaries, just with 4 per cent of its profits," union leader Julio Ortiz told Reuters. Tensions in the sector have risen as prices for most of the country's metals exports have fallen because of the global economic downturn. The national labor federation says nearly 10,000 mine workers have lost their jobs since November.