Rio and BHP face seaborne competition

For many years Rio Tinto (ASX: RIO), BHP (ASX: BHP) and Vale have controlled the lion’s share of the international seaborne iron ore market, supplying over 65% of total shipments.

They have used their market joint market power to influence prices and demand by adjusting the amount of production they desire for a particular period. They have also used information on their competitors to control the market, but that’s about to change.

The Centre for European Policy Studies and the European Capital Markets Institute reviewed the global commodities supply chain and said the big miners’ “competitive advantage” could be challenged by changes in the global freight market. “Oligopolistic setting is often influenced by external factors, such as freight industry capacity and easier (cheaper) connectivity between regional areas” the report said.

According to The Sydney Morning Herald, the volatility in iron ore prices caused by freight costs made tough work for smaller miners in regional areas. This may about to change. “Recent changes with the increase in capacity of the freight industry have stabilised costs of freight for some time and ensure easy connectivity at a global level” making it easy for new regional areas to keep costs low and be competitive on the international market.

Iron ore miners like Gina Rinehart’s Hancock Prospecting through its planned Roy Hill project and Fortescue (ASX: FMG) will also enjoy the stable freight costs. This will allow them to be much more competitive on contracts, particularly in Asia.

Foolish takeaway

Although smaller iron ore miners may be more competitive in price, they are likely to be in terms of cost. Vale remains the lowest cost producer and some estimates put its new Serra Sul project’s costs per tonne of iron ore to be as little at $15. Compared to Fortescue’s $36 per tonne, it’s quite a difference. However, top commodity analysts predict the spot price of iron to plateau between $80 and $88 per tonne, which leaves healthy margins. Perhaps if investors are patient they may get iron ore stocks cheaper in coming years.

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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

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