VCRD"s Chinese Dream

Reporter Yang Peiju

The dust finally settles down. With the Notice on Port receiving fortythousand-ton ore carriers was issued by the Ministry of Transport and the National Development and Reform Commission, the policy that port is opened up to large ships is very clear. The hard confrontation that has lasted for several years between VCRD and the domestic shipping industry is thereby resolved.

Professor Liu Bin believes that VCRD shook hands and made up with Chinese ship owners. It seems on the surface that Chinese ship owners have won this time, however the fact that VCRD still has a monopoly role in iron ore shipping has not changed. We should notice that Chinese ship owners had just got a partial victory. Our shipping industry should realize that we still have many problems with ourselves.

In the fi rst place, the integration of Chinese ship owners is not close enough, each one involved its own business and there is no awareness of joint action and united development. It is reported that domestic enterprises have changed FOB contract to be CFR contract (sellers pay the freight), that means Chinese steel mills give up chartering option to mine traders. This change is causing big changes in shipping industry. Chinese enterprises will take more costs and risks. Chinese ship owners have been expecting chartering option of iron ore transportation for a long time. It is a pity that it has been easily sent to mine traders. It is going be very hard to get it back.

In the second place, all domestic parties are not alert to changes in iron ore market. In Mar. 2010, VCRD declared its marketing strategy has been changed to a new and fl exible pricing model, quarterly pricing model instead of yearly pricing model. Soon afterwards, the second and the third largest ore enterprises declared that they have reached agreements with great majority of Asian clients on basis of CIF and short-term price.Yearly pricing mechanism that has continued for the last thirty years was abolished. Three greatest mine traders took this opportunity and put forward quarterly pricing,monthly pricing, on-site pricing and index pricing. The price of iron ore is changing every month, price index is on basis of spot market.

At present, iron ore market is controlled by financial groups behind mine companies. An insider disclosed that in staple commodity markets like iron ore market,financial institutions are the leading bodies with great energy. VCRD, BHP, Rio Tinto, Goldman Sachs, J.P Morgan, Citicorp and HSBC, all of these institutions invest in iron ore market. On one side, iron ore price and ocean freight are under control. On the other side,these institutions stimulate the market and release priceincrease report during sensitive price period. The three greatest mine traders have already controlled iron ore F.O.B price, once ocean freight was controlled, the market will be more complex. China has to face great challenges.

Professor Liu Bin indicates that domestic enterprises should think over three aspects. Firstly, learn and take action. Secondly, the most important is to take action.Then control capacity and volume. Capacity is not the crux of the matter, but volume is of great signi fi cance.Chinese enterprises should learn to control volume.China has great quantity of cargo, however domestic enterprises take up only a small share. Without cargo volume, a company will run at a loss even if it has just one ship.

Actually, the most difficult part of the war has not yet begun, our enterprises are still not giants, we have not got prepared. There will be many stories about the iron ore markets in the future, brilliant or sad ones. China will be an important role in these stories.