It may be too early to start beating the drums of victory for free-market capitalism, but there are signs that China is stepping back from attempts to control the iron ore market.
Just three months after accusing major iron ore producers of manipulating prices, China plans to scrap it's decade-old import licensing system, a move that may eliminate middlemen in the market, lower costs for steel mills and improve transparency.
It also looks like a strategic retreat for the world's biggest buyer of iron ore in its battle to win pricing control from the big three producers, Brazil's Vale and the Anglo-Australian pair of Rio Tinto and BHP Billiton .
The planned end of the licensing system will happen in the second half of the year, according to a Reuters report on June 13 that cited a source with knowledge of the matter. .
The current system requires import qualification licences to be granted by government-backed industry bodies like the China Iron & Steel Association.
It was designed to eliminate speculative traders from driving up prices and force the steelmaking industry to present a united front against the producers.
However, it allowed middlemen to rent out licences and thereby drive up costs for steel mills, who couldn't import directly.
Under the proposed changes, iron ore importers will only need the same type of licence required by other commodity buyers, meaning steel mills should be able to buy directly from miners and traders alike.
While this may not have much impact on iron ore prices in the short term, it could have important ramifications over time by lowering the cost of imported ore versus domestic supplies, which may boost the volume of foreign ore.
It's also not clear how plans to scrap the licensing requirements will fit with another recent proposed change, namely to force importers to use a domestic trading platform.
New licences were to be conditional on importers using the China Beijing International Mining Exchange (CBMX) platform, according to a Reuters report in April.
The big three miners are members of the CBMX, but they also back the Singapore-based globalORE system, which currently handles more of the physical trade than its Beijing rival.
The Chinese move to support the CBMX was most likely aimed at trying to wrest pricing power away from the miners, especially given the allegations by authorities that the big producers manipulate prices.
China's top economic planner said in March that the miners were behind the 83 percent rally in the benchmark Asian spot price between September's three-year low and a peak of $158.90 a tonne in February.
This was an extraordinary accusation by the National Development & Reform Commission (NDRC), especially since it came without any substance, other than an unsubstantiated claim that shipments were held back in order to control supplies and send a fake market signal.
The NDRC appeared to conveniently ignore the fact that the rally in prices coincided with record imports by Chinese steel mills, with December being the strongest on record.
It's also no surprise that the recent price slump has resulted in a surge of imports again, with April and May being the third- and second-strongest months, respectively.
Spot iron ore fell more than 30 percent from its February high to a low of $110.40 a tonne on May 31, the lowest in almost eight months. It has since recovered slightly to $113.60 a tonne on June 14.
As I wrote in March, there was probably a stronger case to say that iron ore was manipulated weaker when the spot price plunged 42 percent between April and September last year, even as China's imports held up remarkably well considering the weaker economic outlook prevailing at that time.
Nonetheless, the concern remains that iron ore prices are subject to manipulation given the situation of one major buyer that accounts for more than 70 percent of the global seaborne market and three big producers that supply roughly that quantum.
Currently iron ore is priced on benchmarks produced by Platts and Metal Bulletin, who in turn base their assessments on collecting information on deals from market participants.
While the methodology used by these agencies is solid and robust, the system still relies on everybody being absolutely honest, and in the absence of a deliverable futures market, there will always be the temptation for involved parties to try and manipulate prices in their favour.
But I would argue that it's difficult to do this on a sustained basis, although a liquid futures market where participants have the obligation to deliver on contracts would certainly boost transparency.
But for now, it appears the Chinese may just be resigning themselves to the reality that they are unlikely to be able to control the iron ore market, so they may as well do what's possible to cut unnecessary costs from the system.
Disclosure: At the time of publication Clyde Russell owned shares in BHP Billiton and Rio Tinto as an investor in a fund.
Source: Reuters (By Clyde Russell)