The Rising Influence of Rising Affluence

[DewDiligence]

VALE Ups Price of Iron Ore by ~35%

[The new quarterly pricing scheme used by the big-3 iron miners (VALE, BHP, RTP) is turning out much better for them than the old annual-benchmark system would have; despite some recent backtracking, the spot price of iron ore has mostly risen in tandem with the global economic recovery and remains sharply above 2009 levels. VALE’s version of the industry’s new pricing scheme bases the contract price for the new calendar quarter on the spot price one month before the end of the old quarter. (E.g. the contract price for Jul-Sep is based on the spot price May 31.) The above formula applies whenever the spot price falls on the target date falls outside a band of ±5% from the contact price of the previous quarter.

Please see #msg-43960884, #msg-45843807, and #msg-48499487 for related stories.]

http://finance.yahoo.com/news/Brazils-Vale-to-raise-iron-rb-1644389028.html?x=0&.v=2

›Sunday May 30, 2010, 11:41 am EDT

RIO DE JANEIRO (Reuters) - Brazilian mining company Vale will raise iron ore prices about 35 percent to as much as $145 per metric ton in July as part of a switch to quarterly pricing, a Brazilian newspaper reported on Sunday,

Markets widely expect iron miners to boost prices to bring them in line with spot ore prices following a shift away from a decades-old benchmark system, although analysts were still unsure exactly how the new pricing mechanism works.

O Estado de São Paulo newspaper did not say where it obtained details about the percentage of the price increase by Vale (NYSE:VALE; Sao Paolo:VALE5.SA), the world's largest iron ore miner. [This paper has credible sources, so one can assume the report is accurate.] But it cited Vale Ferrous Metals Director Jose Carlos Martins confirming the company would raise prices for steelmakers.

"In the second quarter, our prices were well below the spot market price in China," Martins told the paper.

"Under the current formula, our expectation is to recover a large part of that difference in the next quarter, which starts in July," he said, apparently referring to a system of indexes that adjust prices based on the spot market.

The world's top three iron ore miners -- Vale and Anglo-Australians BHP Billiton (BHP) and Rio Tinto (RTP) this year dumped the benchmark in favor of quarterly pricing, but the exact nature of how they calculate the price has not been fully disclosed. [Actually, VALE disclosed enough details on its most recent CC that investors can come very close using publicly available data.]

The exact amount of the price increase will be determined on Tuesday [because it’s based on the spot price at the end of May], the newspaper said.

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

Interfax this month reported Vale was asking Chinese steel mills to pay an iron ore price of $160 per metric tone in the third quarter -- 23 percent more than in the second quarter -- citing an unnamed source at Wuhan Iron & Steel.

Vale has said it was open to negotiating different indexes or a basket of indexes and different averages, but it did not disclose which index it mostly settled its prices based on.

Some analysts said the company was using the Platts Iron Ore Index, which is cleared by the InterContinental Exchange (ICE). Currently, there are three index providers: Platts, The Steel Index and Metal Bulletin Iron Ore Index.

Spot iron prices have fallen some 20 percent to $145 per metric tone since late April highs near $185 as buyers fret about the resilience of China's economy and the strength of steel demand in the second half of the year. [However, as noted in the prologue of this post, the Jul-Sep contract price is based on the spot price at the end of May.]‹