The Rising Influence of Rising Affluence

[DewDiligence]

Is Quarterly Iron Pricing a Fait Accompli?

[Asian steel producers other than China are now on board with the quarterly pricing system, but China thinks it has the leverage to hold out for an old-fashioned annual benchmark (#msg-48543500). What have the Chinese negotiators been smoking?]

http://www.reuters.com/article/idAFN0113226720100402

›April 1, 2010
By Brian Ellsworth and Denise Luna

RIO DE JANEIRO, April 1 (Reuters) - Brazilian mining company Vale said on Thursday it has moved most of its iron ore sales to quarterly contracts, a death knell to the traditional benchmark system delivered by a company that was once its staunchest defender.

Vale, the world's top iron ore producer, said it had moved 90 percent of its iron sales volume to quarterly contracts, matching a move by Anglo Australian miner BHP Billiton <BHP.AX> and upping pressure on Rio Tinto <RIO.AX> to move off the benchmark as well.

"Vale S.A. (Vale) announces that it has reached agreements on a new iron ore pricing regime with the majority of its clients, based on short-term market references and price changes on a quarterly basis," the company said in a release.

But the statement did not provide details on the pricing for those agreements, which will likely form a baseline minimum for negotiations with steel mills in China -- now the world's top steel producer and No. 1 iron ore buyer.

Other analysts added that the move would probably have little impact overall on the market because the move to quarterly pricing has already been widely expected as both Vale and Anglo Australian BHP Billiton push to overhaul the benchmark system.

"The change in contracts is not much of a surprise since Vale and the other miners have been talking about this for some time. It's already been priced into the market," said Tony Robson, an analyst with BMO Nesbitt Burns in Toronto. "We're considerably more interested in the price they settled at."

A Vale spokeswoman said the company would not comment on pricing.

An industry source speaking off the record said the prices for each quarter would be based on the average spot prices during the previous quarter, not including shipping costs.

"Vale's going to have an amazing year. This is going to be very good for the company -- the benchmark is over," the source said. He said Vale did not announce settlement prices because it is waiting for BHP and Rio to announce theirs first.

Sources told Reuters Vale and Nippon Steel, Japan's biggest steel producer, have reached a basic agreement for a $100 to $110 per tonne of iron ore price in the April-June quarter.

This is a jump of 90 percent over the previous benchmark levels but still well shy of prices on the increasingly important spot market, where prices are now more than $150 per tonne after doubling since September.

South Korea's POSCO, the world's No. 4 steel maker, said it had "provisionally" agreed to a price of $100-$105 per tonne for April-June iron ore imports with Vale.

Vale's move off the benchmark will give momentum to a global trend toward turning iron into a modern commodity like crude oil, traded through derivatives such as swaps and frequently drawing in capital from investors and speculators.

But steel industry leaders question whether the iron ore market can be considered a modern and competitive one when three big miners -- Vale, BHP and Australia's Rio Tinto -- control some 70 percent of the seaborne trade for the commodity.

Vale's announcement comes hours after the World Steel Association said the change would harm the steel industry and urged a review by regulatory authorities, following similar requests by European steelmakers.

China's government has thrown its weight behind the benchmark, even though China's massive growth and sprawling array of aggressive quasi-state importers were key factors in unraveling the mechanism.

Chinese buyers repeatedly violated contracts with miners by buying on the spot market when prices fell below the benchmark, but then insisted the miners go back to the benchmark once prices went back up. [No kidding.]

This cost the miners billions of dollars in revenue and let many importers pocket speculative gains by reselling iron ore as spot prices soared.

This put further strain on the decades-old system in which the three big miners negotiated prices with a handful of steelmakers in benchmarking talks that set prices for the rest of the market.‹