An obscure phenomenon in the business world — the pricing of iron ore — is quickly escalating into a high stakes melodrama that some believe could end up benefiting Canadian iron-mining companies.

The three companies that dominate global production — Brazil's Vale SA, and the Anglo-Australian companies Rio Tinto Group and BHP Billiton Ltd. — are going head to head with China, which last year imported close to 630 million tonnes of iron ore, making it the world's leading customer.

A haulage truck at an Iron Ore Company of Canada mine in Labrador. The company is expected to be just one of the Canadian mining companies to benefit from rising ore prices. (CBC)

The two sides are squaring off over the annual setting of the benchmark contract prices for the fiscal year that begins in April.

Each year at this time, the big three producers negotiate what those prices will be with their leading customers in Asia and Europe, but the negotiations with China have become increasingly dramatic in the last year, says Jim Letourneau, who publishes a newsletter for investors in mining stocks in Calgary.

China and Japan have been chafing at the ability of the big three producers to command a strong position in negotiations even during last year's recession because of their overwhelming market share.

Last July, China arrested four Rio Tinto executives and charged them with bribery and infringing trade secrets. They are still being held and have yet to face trial.

Last July, China arrested four Rio Tinto executives at the company's Shanghai office and charged them with bribery and infringing trade secrets. They are still being held and have yet to face trial. (Associated Press)

"I consider them almost as hostages in the negotiations," Letourneau told CBC News. "So, it makes it very difficult for iron ore executives to even want to set foot in China now because you never know what's going to happen."

In fact, the Financial Times and Agence France-Presse have both reported that this year's negotiations are being held in Singapore.

And it's widely reported that the big three producers this year plan first to reach a deal with Japan and then present those terms to China as a done deal.

"The deal gets presented to the Chinese as 'This is what the rest of the rest of the world is paying; now, take it or leave it'," said Letourneau.

"The big three have that kind of pricing power because they control 70 to 80 per cent of the sea-borne iron ore trade, which is how China gets its iron ore, so it gets really nasty."

The same economic stimulus spending that has powered China's rise to become the world's leading exporter in December 2009 has also increased steel demand from the country's 72 major steelmakers and hundreds of smaller operations and resulted in "very strong" requirements for iron ore, said Patricia Mohr, vice-president for economics with Scotia Capital in Toronto.

Import volumes at record highs

Since the spring of 2009, import volumes of iron ore into China from major suppliers in places like Australia and Brazil have moved to record highs.

Cash prices have risen sharply as Chinese traders build up stocks before a new contract price is negotiated. The China Daily newspaper has reported iron ore prices soaring to about $150 US per tonne, more than double April 2009's low.

Mohr said it's hard to say how long it will take to conclude negotiations.

"Even though prices moved down last year, they remained historically quite high, and it is of some concern to Chinese steelmakers in particular and also to Japanese steelmakers," she said.

Rio Tinto three-month chart.

"This year, I'm expecting contract prices to move up at least about 14 per cent from key export points in western Australia into the Asian market. So there probably will be quite a nice jump in price. It could be more."

Industry analysts have been falling over themselves to raise their estimates of profits for Rio Tinto and BHP Billiton, with Deutsche Bank AG recently raising its forecast by as much as 39 per cent.

BHP Billiton three-month chart.

Mohr predicted Canadian producers, even though they are more focused on western European markets, will also benefit.

"Canadian producers, most of who are found in Quebec and Labrador, can also expect a double digit price increase," predicted Mohr, perhaps of about 12 per cent.

That alone would add to their potential profitability, but Letourneau said junior resources companies might also see their share prices increase on speculation about asset sales to Chinese companies.

Asian steelmakers, fed up with the market power of the big three, are "motivated to go out and find their own sources," Letourneau said. "So, the opportunity is for junior companies developing iron ore projects that China might want to come along and buy later on."

Vancouver-based Cardero Resource Corp. sold its Pampa de Pongo iron ore property in southern Peru to a Chinese steelmaker last year for $100 million US. Letourneau said he expects Cardero could do more deals and that Toronto-based Baffinland Iron Mines, with its property in Nunavut, and Calgary's New Millennium Capital Corp. could also do similar deals.

Prices good economic barometer

Higher iron ore prices will be good overall for a commodity-based economy such as Canada's, said Letourneau.

"[They are] a really good barometer for economic activity," said Letourneau. "Demand for steel creates demand for iron ore; demand for iron ore creates demand for shipping and demand for drilling and miners.

"So, there's a whole chain of activity that's created just by the stimulus spending in China."