Market Watch quoted analysts said Australian iron ore miners and their global peers could soon find China property market to be an unexpectedly large factor in their short term fortunes.
The problem lies in the miner’s new ore pricing model.
The revamped system, supported by mining giants BHP Billiton Ltd and Rio Tinto PLC, shifts the pricing of iron ore contracts towards quarterly averages in the spot market or in some cases monthly averages.
The new pricing scheme replaces the annual-price benchmarking system, begun in the 1960s and used more or less universally up until March a process, typified by long negotiations in which miners and their steel mill clients set a single price for an annual contract. The new system was seen as a benefit to miners in the short term, so long as commodities continued to rise.
The problem for BHP, Rio Tinto and others is that the system has the opposite effect on their revenue during commodity downturns and more generally, exposes them to unexpected shocks of the kind that some analysts believe are now brewing in China housing market.
Mr Sean Darby Nomura International strategist in Hong Kong said "I am quite bearish on base metal resource stocks, since the implied prices of their commodities are not demonstrating any realistic view of the future slowdown in China property prices."
Mr Darby warned in April of a perfect storm striking the Chinese real estate sector, as government efforts to cool the market were likely to coincide with dwindling sales volumes and increasing supply.
He said in a research note earlier this month, the growing disparity between property prices and a share price index of real estate developers, which have moved in opposite directions since October, foreshadow a downturn.
So far, however commodity markets have mostly shrugged off concerns surrounding China housing market, as investors look instead to that nation accelerating economic growth rate. A gauge of daily iron-ore spot prices at Chinese ports known as the Steel Index, surged to a record USD 186.50 per DMT on April 21st trading at an average level 25% above those in March.