COSCO, the world’s biggest shipping line for bulk commodities, yesterday singled out Newcastle’s dysfunctional coal loading systems to explain why iron ore shipping costs have doubled in four months and quadrupled since early last year.

"That’s why in Newcastle there are so many ships; more than 100 vessels waiting for coal," said Yang Shicheng, deputy director of research at the COSCO group. "It is such a bad situation in Australia."

With about one in 20 of the world’s bulk dry commodity ships tied up in a traffic jam at Newcastle on any given day, the average price for hauling ore in a cape-size ship to China has just broken through $US200,000 ($217,000) per day, from an already heated $US100,000 in the middle of the year.

Perversely, Newcastle’s contribution to unprecedented global freight costs has helped lever BHP Billiton into its strongest-ever bargaining position.

Suddenly, it is far more cost effective for Shanghai steel makers to float ore for 10 days over 5000 kilometres from Dampier in Western Australia, than to cart it for 40 days over 20,000 kilometres from Tubarao, Brazil.

He too would like a piece of it: "Collecting this $US30 billion is a marvellous dream."

Traders and conference goers have booked out all 563 rooms at the Shangrila and 626 rooms at the equally extravagant Furama Hotel next door. They are waving mobile phones and openly signing contracts in the foyers and over cups of Chinese tea.

That’s why BHP Billiton is feeling bold enough to effectively boycott
what is being dubbed as the world’s most influential iron ore and steel
conference this week in Dalian, a port city of northern China.

Senior BHP executives say they have no interest in receiving yet
another beating from Chinese officials and companies about their
"irrational" iron ore contract prices.

The China Iron & Steel Association conference at the palatial
Shangrila Hotel, sponsored by Brazil’s CVRD, represents the orthodox,
40-year old benchmark price negotiation system.

BHP, and probably Rio Tinto, would prefer to be wheeling and dealing
with the spot market traders who have packed into the hotel’s three
floors of meeting rooms and cocktail lounges, and who are spilling down
the escalators and out into the street and neighbouring hotels.

These Chinese, Indian, Russian, Kazak and Iranian traders are creaming
the largest windfall profits from China’s steel revolution. China’s
iron ore spot trade is now worth more than the contract trade, said
CVRD’s executive director Jose Carlos Martins.

Siddique, the Shanghai representative for Iran’s Tradeline company, said he is doing a roaring trade but is getting worried about America’s new anti-terrorism financial sanctions. "My worry is we won’t

get paid because the Chinese will have no way to get the money to us," he said.

Ore loaded onto boats in Dampier at $US50 tonne is selling for as much as $US200 a tonne in the corridors of the Shangrila, via a long line of official Chinese and international private traders.

"We are buying ore at $US175 a tonne and selling it for $US180, or $US200 for 64 per cent grade," says Lin Mengzhao, from the private General Nice (Tianjin) Industry Co.

Many small steel makers, traders, and indeed Australian mining executives reserve their harshest words for the state-owned trading house SinoSteel, which owns a large stake of the Australian Channar iron ore mine and frequently berates Australian companies for charging high prices.

"There’s a lot of Chinese scum-of-the-earth traders who are sending the price sky-high," said Fan Yu, who owns a mid-sized trading house in the heart of China’s steel country, called Tangshan Mingzhu Trading Co. "SinoSteel get their iron ore contracts very cheap and they sell it themselves," he says.

Devdat Jai, the Shanghai representative for India’s Psons Ltd, has sold 1.5 million tonnes of high-cost Indian ore this year about 10 times the profit margins of last year.

He says BHP and Rio are in the wrong game. "Long term contracts were good two years ago, but today the spot price is rising every day," he says. "They should change their policies and sell 50 per cent on the spot market."

Wang Xinhe, from the Tianjin Dragon Peak Iron Trading company, did not know Australian miners only received about a quarter of the top prices he is now paying. "Your iron ore is the most expensive, but it’s also the best," he said.

The Chinese steel industry is divided into the large and usually state-owned factories that get cheap, high quality ore from Australia and Brazil and the rest. The smaller operators are forced to brave the vagaries of the spot market.

"In Tangshan there are 22 blast furnaces, and the more they produce the more they lose," says Fan Yu.

SYDNEY, Sept 25 (Reuters) – Australia’s Newcastle port, the world’s largest coal export terminal, will cut producers’ total shipping allocations by a larger-than-expected 2.2 million tonnes in the fourth quarter to reduce vessel queues.

The cut will put further pressure on tight global supplies, with world coal prices already having risen sharply in recent weeks, and may force major importers to look for alternative suppliers.

Total shipping allocations for the Oct-December quarter would fall to about 23 million tonnes of coal after the cut, Newcastle’s operator Port Waratah Coal Services (PWCS) said on Tuesday.

"It’s a sizeable loss of supplies. The cut could lead to some scrambling amongst buyers for coal, which would underpin prices through the fourth quarter," said a trader.

Benchmark spot Australian thermal coal prices on the global COAL NEWC index jumped nearly $3 to close at $70.25 a tonne on Monday, following a Reuters report that Newcastle port would be cutting export allocations by at least 1.7 million tonnes in the coming quarter. [ID:nSYD165280]

"The decision was made based on several issues, including underperformance and a derailment of the rail transport system last week," Graham Davidson, general manager of PWCS, told Reuters.

The port, which reinstated a capacity balancing system (CBS) in May, has cut export allocations three times this year. The latest cutback would result in 6.5 million tonnes of coal being removed from the market in 2007.

Port congestion and long vessel queues at Newcastle, which reached a record 79 ships following storms in July, have been a headache for coal miners such as Centennial Coal (CEY.AX: Quote, Profile, Research), Rio Tinto (RIO.AX: Quote, Profile, Research)(RIO.L: Quote, Profile, Research) and Xstrata Coal (XTA.L: Quote, Profile, Research), which have seen their profits dented by surging demurrage costs and lower sales.

Although the allocation system has reduced vessel queues significantly to a 10-month low of 44 this week, the length of the queue is still double the port’s target of 20 ships by November.

BULLISH SENTIMENTS

Traders said the cut, which comes as demand increases ahead of the northern hemisphere winter heating season and amid tight supplies, would significantly tighten the Pacific market and may force Asian utilities to again scour for coal from as far as South Africa.

"They might well have to rely on South African coal again if they can’t buy any coal from Chinese or Indonesian producers," said a trading source.

"Utilities were able to turn to Chinese sellers in the past few months but domestic demand from China is also expected to surge in the fourth quarter because of winter."

Industry sources said market sentiment had changed significantly in the past week, following an extraordinary bull run in the coal swaps market which saw delivered coal prices into Amsterdam-Rotterdam-Antwerp (ARA) breaking the $100 a tonne barrier on Thursday. [ID:nL20737001]

The move by Korean utilities to already secure 2008 term contracts with Australian producers in anticipation of a worsening supply shortage next year has also boosted spot prices.

Stranded coal ships, severe flooding and looting in the Hunter valley…

According to BRW’s June edition, export opportunities for Hunter based businesses to Asia have never looked brighter.

Hunter exporters traditional have not looked to India as a destination, but India looks like its going to knock off the US as Australia’s fourth largest non-service export market. Also, Korea moved in to third spot only ahead of the US only a few months ago.

Australia’s top four non-service export markets 2007

Japan $24.6B – China $16.6B – Korea $10B – US $7.3B – India $7.1B

Source: Australian Bureau of Statistics