This is our reality if we all trade, buy and make money in a (at times) brutish capitalist system. Other wise you live in happy land, were all the fairy people live, dancing around in a fantasy world.
So, business in a downturn gets desperate you have lay offs, profits are squeezed and creditors get frisky and bankruptcy's and business failures are ensured. The true nature of business is to survive. Negotiation, planning and restructuring of business models occur, some naturally can adapt to a downturn others are removed from the face of the map. All and all it gets dirty. If you worked for a business you'll know this, you'll see (if the allow you into boardrooms) the frantic attempts at negotiation on everything just to stay alive.
Now, intercontinental (country to country) business deals are not much different, in fact they can be harsher. The current dispute over iron ore pricing with China and Australia is a perfect example. A detained Australian citizen (worked for Rio Tinto) in China and China putting the squeeze on Australia (which it can). The US Federal Reserve under that ridicules person Ben Bernanke has ensured that the base currency of the world, the currency everyone trades with, is debased, devalued and essentially discarded. What the US administration is failing to comprehend is devaluing a global base currency like the USD (apart from making China frustrated at it's USD and Treasury holdings) is causing the last of the high yield currency's (which happen to be commodity backed currencies) such as the Canadian Dollar, Australia Dollar and the Brazilian Real, to move higher in value. We have had and are still having a global slow down, governments have created huge deficits to stimulate their economies, so essentially the global economy is being propped up by government stimulus. China which has been crunched by the global recession is desperately trying to maintain it's huge economy and population, at all costs. China simply cannot go from an export producing economy to an consumption driven one overnight. They know this, so China is replacing collapsed US demand for Chinese goods with economic stimulus.
Boosting export currencies by devaluing the world's base currency causes export countries to suffer more in a downturn. In other words all countries at some point will need to devalue their currencies to keep in line with the US dollar. Since the US monetary policy is for indefinite devaluing of the US currency; a hampering of global export markets will maintain.
China needs iron ore and it aint going to pay top dollar either, as other countries have been crunched by the global recession the commodity producing countries have suffered as demand has collapsed the markets have been hard to sell exports in, again a declining USD has forced high yield currency such as the AUD and Real upward hence putting pressure of spot prises for commodity exports - all this when global economies have tanked. So the foolish play here is companies battling for market share, even though there is a handful of bigger mining companies, is to try and renegotiate a higher cost when your buyer wants a lower one (because of a global recession).
The Chinese have the upper hand and they will play ruff, these are desperate times and the magnitude of a country like China unable to keep it's workforce busy is frighting. So the Chinese can force a lower price anyway they want. Australia is the smaller side and it will be captive to the larger side if it is stubborn. This is occurring now. Brazil will still want to sell it's iron ore, China can starve off both economies before it's own economy goes critical. It (China) has stock piles, it can sit out for awhile. China can push Australia further into recession, cause some pain, as it could with Brazil. Brazil now is solely trading with China with it's exports. But Brazil may crack first, if China puts the squeeze on, so Brazil may come to an arrangement prior to Australia in lowering it's iron ore price. As it has more kinship with China (part of the BRIC countries...I know terrible term), if Australia wants to play the 'America centric' arrogance, such as 'we are still running the world shit'. Australia will get hammered back into recession. Australia will suffer from export markets collapsing and a high currency (re: the USD being thrown in the bin). American consumption will not come online for years, if ever to it's peak as there is a queue of crisis's lining up in the years to come.
Conclusion, don't mess with China. It's your buyer, better than nothing. There will be absolutely no V shape recovery on the cards, it will be a flat lined L shape for years. All countries like China will be supporting their economies indefinitely with stimulus, thus creating massive fiscal deficits. In the short term economy producing countries should try and ride this out, but deficit issues will come to the boil at some point. In the mean time, they give you money for your products and no one else is buying, you take it.
Brazilian exports graph: note the sharp increase to China (even in a global downturn, good indicator on stockpiling and a possible peak in commodity buying; inline for more aggressive negotiation)
Article detailing Chinese influence in Latin America July 8th 2009 From McClatchy Newspapers
"China is beefing up its embassies throughout Latin America, opening Confucian centers to expand Chinese culture, sending high-level trade delegations throughout the region and opening the door for ordinary Chinese to visit Machu Picchu, Rio and other tourism hot spots.
Aiping Yuan came to Rio de Janeiro from Beijing in 1997 on a lark, fell in love with the city and decided to stay. She studied Portuguese, and when Brazilian President Luiz Inacio Lula da Silva made his first visit to China in 2004, she opened a small school in Rio to teach Mandarin.
She began with six students and today has 300, including senior executives at Petrobras, the country's biggest oil company, and Vale do Rio Doce, the biggest mineral producer. Both have growing business with China.
"Chinese is the language of the future for Brazil," Yuan said with a big smile.
China has forged a strategic alliance with Brazil that's allowed the two countries to partner with India and Russia in the so-called BRIC grouping, which is demanding a greater voice in global political and economic affairs. Indeed, China is making inroads with developing countries worldwide.
Beijing's main interest in Latin America has been guaranteeing access to the region's raw materials — principally oil, iron ore, soybeans and copper — to fuel its continued rapid growth. For many countries, there's a downside in the China trade, through which cheap imports have displaced local textiles."
Article detailing the demand falling off Australian iron ore July 20th 209, The Australian:"While Rio enjoyed strong iron ore exports to China in May-June, demand from Australian ports had softened, according to global shipping market information provider Baltic Exchange.
"We've certainly seen a recent softening of demand from the Australian ports from the last few days or a week or two," Baltic Exchange's chief executive, Jeremy Penn, told ABC TV yesterday.
"But we've also seen a lot of fixtures from Vale, in Brazil, to China . . . so there's been continuing demand there for freight of iron ore."
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