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    The real price of iron ore increases: Dryblower

    Monday, January 17, 2005
    A CENTRAL plank in Chinese philosophy is about the yin and yang of life, how opposing forces make up the universe – sun and moon, light and dark, man and woman, and all that stuff. What an amusing thought then to see ying-and-yang come to bear on a far more interesting force; making money from iron ore.

    Last week Dryblower, and everybody else, saw the yin factor at work when Rio Tinto dropped a bombshell on its Japanese customers and said it wanted a 50% increase in the price of its Australian iron ore.

    The effect was startling. Rio's shares hit a 12-month high, and the price of every other iron ore miner, including BHP Billiton, jumped sharply.

    But, if the Chinese have got it right, there ought to be a yang, and Dryblower reckons he has spotted the opposing force at work.

    First hint that you can't have a yin without a yang came on the Tokyo Stock Exchange where the impact of higher raw material prices, which had sent Rio skyward, drove down the price of Japanese steel producers.

    Interesting. Here is a classic example of one man's fish being another man's poison. What else is affected by a 50% price hike – even if it is eventually boiled down to 25%?

    And the obvious answer to that little question is second-tier miners, and would-be miners because nothing is likely to stir the Japanese and Chinese steel mills into encouraging new sources of supply than a 25-to-50% price hike.

    Immediate winners are easy to spot from what is a fast-moving situation. Portman has successfully sold itself to Cleveland Cliffs at what some observers believe to be an obscenely high price.

    Mt Gibson, Aztec and Mid-West are rubbing their corporate hands with glee, and Andrew Forrest can hardly believe his luck as he pushes to start something with his Fortescue Metals Group. Even Gina Rinehart, as she dances a legal tango with Anglo American, must be getting just a little excited.

    To all these players, Dryblower says the best of luck – but, to Rio and BHP Billiton he says watch out. Why? Because of that Chinese belief in yin and yang – that is that you can't have a force pushing in one direction without a significant effect in the other direction.

    And the most likely impact of a 50% iron ore price hike is that the Japanese and Chinese steel mills will now shift heaven and earth to encourage alternative sources of supply, and to offer the long-term contracts that new miners require before they can get bank finance.

    Even without an understanding of yin and yang it is easy to see what's going through the minds of steel mill executives, and it's along these lines: "you guys are doing me over – and I'm not going to forget this".

    To bring it down to a commonplace level, Rio's push for a 50% increase may turn out to be a case of someone killing the goose.

    Yes, there will be short-term benefits, but in the long-term it is now an absolute certainty that anyone wanting to launch a new iron ore mine will get whatever contract they desire just so the steel mills can get alternative supply, even if it means encouraging gross over-supply as happened in the 1970s and 80s – or should that be, especially if it encourages gross over-supply.

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