RBA Leaves Rates Unchanged, Rio Wraps Up Negotiations

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The Reserve Bank of Australia isn’t moving rates up yet. The Bank left them at 7.25% after meeting yesterday in Sydney. Later this month it will review CPI data. But for now, the Bank seems satisfied that its rate-hike campaign has slowed demand in the Australian economy. Not enough to kill off the 17-year growth streak, mind you. But enough to contain the demand for credit and slow down consumer spending.

Later today two figures will come out that may or may not confirm the RBA’s early declaration of victory over inflation. Home-building approvals will be announced as well as retail sales. If those are muted, the RBA might indulge in a smile or two and some handshakes. Perhaps they can sing the song, if the Bank has one.

The Bank is walking a fine line. It says it expects CPI to remain high now, but believes it will be lower later, which means rates can stay the same. Got that?

But it’s clearly worried about the strong terms of trade. “The rise in Australia’s terms of trade that is currently occurring…will add substantially to national income and ability to spend, even with the slowing in global growth to below-trend pace that the Bank is assuming. At the same time, rising prices of oil and a range of other commodities are adding to global inflationary risks.”

Speaking of the favourable terms of trade, Rio Tinto (ASX: RIO) wrapped up its negotiations with Asian steel producers this week. Here’s the score card: Korea’s Posco accepted a 97% increase in ore prices, China’s Baosteel agreed to an average increase of 85%, and Japanese steel producers settled on a 95% increase.

Tim Gerrard at Austock says higher ore prices will add $900 million to Rio’s earnings this year and $500 million to BHP’s, according to Matt Chambers in today’s Australian. The trouble for BHP is that while Rio settled early and often for a 95% gain, Marius Klopper’s outfit wants a bigger gain and a new pricing mechanism. BHP hasn’t inked a single deal with steel makers yet.

In fact, BHP’s idea to move to continuous pricing for iron ore based on and index got blasted yesterday by the China Iron and Steel Association. Yesterday’s Shanghai Daily quoted the association as saying, “The index is improper and unfair…it’s not good for long-term stable co-operation between the supply and demand sides, so we firmly oppose it.”

Life is not fair. How iron ore is priced isn’t really a matter of what’s fair. When the market was smaller-fewer sellers and fewer buyers-you could do business over a conference table or a handshake. Not anymore.

The more players in a market, the more liquid. An index would be market-based pricing rather than cartel-based pricing. The Chinese worry that between Vale, BHP, and Rio, just three companies control 70% of seaborne iron ore exports. This is why Andrew Forrest’s Fortescue Metals Group (ASX:FMG has been welcome with open arms by Chinese steel mills.

As we’ve said in the past, China and Australia need each other. It’s in each party’s interest not to antagonise the other. In today’s Australian, Chinese ambassador Zhang Junsai said, “We don’t want to see a monopoly in the international iron ore market. That is not in accordance with globalisation.”

He also said the Rudd government should encourage “an attitude of welcome” for Chinese companies interested in investing in Australian projects. “We have benefited from your development, you have benefited from our development,” he said. “With the development of closer economic relations, it is natural to see today companies from China wanting to invest in Australia.”

The answer to the increase in firepower in the Civil War, by the way, was mobility or greater manouvre. Don’t get bogged down in the trenches. By combing firepower with mobility (the Blitzkrieg), modern 21st century warfare made information a big part of fighting and winning battles. If you move faster than your enemy can react, by the time he’s responding to what you’re just done, you’re already doing to something else. By attacking his brain-his ability to respond to so many reports-you paralyze him.

Dan Denning
The Daily Reckoning Australia

The Daily Reckoning
The Daily Reckoning offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, The Daily Reckoning delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors. Founded in 1999, The Daily Reckoning is published in 7 countries with a worldwide readership of almost 1 million people.
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