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| Spot pricing of iron ore picks up |
| Kunal Bose / Aug 11, 2009, 00:27 IST |
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Indian iron ore miners have always shown a distinct preference for trade in the spot market rather than entering into yearly contracts with their clients on benchmark rates. This is despite the fact that for nearly four decades, the major part of the global iron ore trade is conducted on annual benchmark prices decided after weeks of keenly contested, if not acrimonious, negotiations between the world’s leading mining groups and steel makers.
China, which by far was the biggest destination of our ore exports (101.4 million tonnes last year) and continues to be so this year, is mightily unhappy that our miners would not agree to trade on benchmark consideration. Better off we are because of this resolve. Were not spot prices commanding a premium of over $100 a tonne at one point last year over the benchmark rates? Today also when the chips are down for the steel industry, spot ore sales are fetching a premium of at least $15 a tonne.
According to RK Sharma, director general of Federation of Indian Mineral Industries, China Iron and Steel Association (CISA) has launched a campaign for the abolition of spot trade in ore. To make it a success, CISA must rein in the growing number of speculative importers in the country. CISA, which has a membership of 72 representing three quarters of Chinese steel capacity of over 600 million tonnes, wants the number of licensed importers to be cut drastically from the now active 112.
The Chinese association will try to lay the blame for the emerging vibrant spot market, now naturally catching the fancy of miners, largely at the door of small and medium Chinese steel makers. Whatever it is, the Chinese body now has to reckon with the world’s largest miner, BHP Billiton, announcing that a third of its customers are henceforward to buy ore based on a new price system linked to the spot market. No doubt the BHP deal steals the thunder from CISA, which now appears to be on a mission doomed to failure.
Mind you, the BHP move has come at a time when CISA representing the Chinese steel industry in this season’s ore price negotiations is being rebuffed by the trio of Vale of Brazil, BHP and Rio Tinto over its demand that the benchmark price be cut by up to 45 per cent. Citing the fact that China alone accounted for a little over half of last year’s world iron ore imports of 882 million tonnes, CISA says the country should get a better benchmark deal than the 33 per cent price cut earlier conceded to South Korean and Japanese steel makers.
It will be premature to see in the BHP announcement the beginning of the end of the more than 40-year-old benchmark system. In a highly bullish market caused by strong demand for ore as we saw till the third quarter of 2008, benchmark prices would cease to reflect market reality. But for the stability it lends to the market at other times, the benchmark system finds support beyond steel makers from Vale, the world’s largest ore producer, and Rio.
BHP CEO Marius Kloppers is almost singlehandedly pursuing the mission to change the traditional pricing mechanism of iron ore under which benchmark prices for a season would depend on the relative bargaining strength of the two contending parties - miners and steel makers.
Kloppers believes that the new BHP contracts linked to spot market are pointers to “continued progress towards transparent pricing”. As much as 30 per cent of the company’s total iron ore volumes will henceforth be sold on a mix of quarterly negotiated pricing, spot clearing price and index-based pricing.
Commodity watchers think Kloppers’ move will turn out to be a watershed in the way iron is traded. At the same time, steel makers will see to it that the benchmark system co-exists with spot market sales. Last year, of the world ore production of 1.7 billion tonnes, physical sales were 180 million tonnes only.
No doubt, as CLSA points out, the cost for steel makers on account of ore would have been around 50 per cent more in the period since 2005, had they been paying spot prices instead of benchmark prices. Unwilling to lose revenue on account of benchmark sales, BHP is making a break with tradition.
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