China refusing to budge on BHP premium demands

China refusing to budge on BHP premium demands

Australian iron ore producer BHP Billiton continues to demand a $7.50-$10 freight premium on all shipments to Asia. The company argues that cheaper freight costs put the Australian ore into a highly advantageous position against the Brazilian ore. Therefore, the company is trying to squeeze out a price increase that would be in addition to the 71.5% hike that steelmakers agreed to with Brazil's CVRD and BHP's Australian competitor, Rio Tinto Ltd. BHP claims that the total procurement cost of Australian iron ore is actually $20/metric ton cheaper than Brazilian ore due to the lower freight costs to Asia. Therefore, the company has been trying to tack on up to $10/metric ton over the new price of $50.5/metric ton. If BHP gets its way, its prices would reflect a 105% year-on-year increase. However, sixteen Chinese steelmakers have already voiced their opposition to BHP's demand. The sixteen members of the China Iron and Steel Association (CISA), including Baosteel, Anshansteel and Wuhansteel, have reached a common understanding on rejecting BHP's ’unreasonable' request for a freight premium. The CISA members argue that such a practice on the part of BHP is a breach of international convention. Whether this current controversy will affect upcoming free trade negotiations between Australia and China remains to be seen.