ARTICLE: Rio Tinto Gave Bribes to Many, China Says, By DAVID BARBOZA, New York Times, July 15, 2009

The underlying explanation re: corruption schemes within the iron ore industry in China:

Although Beijing says the Rio Tinto case involves state secrets, that has not stopped state-run newspapers from printing details about it. Many of the articles have also described rampant corruption in the trading of iron ore.

More than a dozen industry officials, steel analysts and traders interviewed this week also said that China's iron ore trade was plagued by corruption.

Experts blame China's two-tiered system for purchasing iron ore for the corruption. While big steel mills are allowed to negotiate long-term fixed price contracts, most small and medium-size steel mills are supposed to buy from the spot market, the more volatile open market.

The system, analysts say, has created huge arbitrage opportunities, allowing big steel mills with fixed contracts to buy far more supplies than they need and then profitably sell excess supplies to smaller mills on the black market.

"There's a huge underground arbitrage market in China," said Ren Qiang, general manager at the Zibo Antai Import and Export Company, which deals in the iron ore trade.

Small mills have long complained about what they see as an unfair system. The practice violates industry regulations, as well as the fixed contract agreements signed with Rio Tinto and other mining companies, analysts say.

The government has repeatedly warned against this type of speculative trading, most recently in a regulation released in February.

But regulators rarely enforced the rules in 2007 and early 2008, when iron ore prices were skyrocketing, experts say.

Sounds like the pot calling the kettle black for Beijing to say this is all about Rio Tinto bribes.

Excellent reporting.