Rio Tinto Squeezes China on Commodity Contracts

Posted by: Mark Scott on June 23

It’s not often companies outmaneuver the economic might of China. Yet when Rio Tinto, the world’s second largest mining firm, announced an almost doubling of iron ore prices with Chinese industrial giant Baosteel on June 23, the London-based company showed just how much sway commodity-based firms now have over the world’s emerging economies.

The agreement (Baosteel will pay up to 96.5% more for its iron ore — the main component of steel) is the largest ever annual price increase and follows a similar deal which saw Brazilian mining giant Vale force its Chinese clients to pay between 65% and 71% more for the commodity. BHP Billiton, the world’s largest mining firm, is yet to announce a deal.

So how can these companies pull off such price hikes? Basically, it’s a question of supply and demand — China (and other emerging economies, for that matter) needs what mining firms can provide, and that’s put the country in a weak negotiating position when signing long-term commodity contracts.

Before you shed a tear for manufacturers in emerging economies, remember these increases probably will wind their way into the prices we pay for goods. If an automaker has to fork out almost double for steel, for example, you can bet that’ll be passed onto consumers through higher sticker prices in the showroom.

Analysts disagree on how much of the increases customers eventually will have to bear. Yet with the cost of iron ore and other commodities predicted to continue to rise in the short- and medium-term, don’t expect the prices of goods to fall anytime soon.