China mills offered cheaper iron ore pricing options-sources

Fri Oct 14, 2011

* Several Chinese mills can buy iron ore based on current spot rate
* Reference period for Q4 rate moves to Oct-Dec from June-Aug
* Follows fall in spot iron ore to lowest since Nov 2010

By Ruby Lian and Fayen Wong

SHANGHAI, Oct 14 (Reuters) - Iron ore miners have given steel mills in top importer China the option to buy the raw material cheaper for fourth-quarter contracts, sources at mills said on Friday, following a fall in spot rates to 11-month lows.

Quarterly contracts are usually based on the average of index-linked spot prices over a three-month period ending a month before the start of each quarter.

But Chinese mills, with margins cut by lower steel prices, are not keen on paying more than $175 a tonne for iron ore -- the fourth-quarter contract rate based on June-August average spot prices -- when the current rate is around $160.

Three sources at Chinese mills briefed on the change told Reuters that iron ore miners, such as top producer Vale SA , have offered Chinese mills the option to pay for fourth-quarter supplies based on more current rates.

"We received a letter from Vale asking us for our opinion of changing fourth-quarter pricing to be based on October-December spot rates," said a source with one of China's mid-sized steel mills.

"Other miners have also said that they would consider steel mills' interests and have therefore made such moves."



Another official with one of China's largest steel mills told Reuters that his company would still buy iron ore based on index, but with the reference period changed to October through December.

A spokeswoman at Vale was not immediately available for comment.

Reuters reported on Thursday that Chinese mills were seeking to postpone shipments or renegotiate fourth-quarter iron ore contracts.

China is the world's biggest buyer of iron ore, the biggest money maker for Vale, Rio Tinto and BHP Billiton which together control around two- thirds of the global seaborne market.

Around 1 billion tonnes of iron ore is traded in the global seaborne market, with about 20 percent sold in the spot market and the rest via long-term contracts.

MORE FLEXIBLE

The debate over pricing options suggests that the quarterly contract pricing system, which the industry adopted last year after scrapping a 40-year-old custom of changing prices every year, may not last for long, traders said.

The industry could soon move to a monthly system to more quickly reflect swings in spot prices, they said.

"Because of the price swings in the spot market, the miners are going to have to be a little bit more flexible with their pricing system," said an iron ore trader in Singapore.

A number of Chinese customers have reneged on their annual contracts in late 2008 in order to source iron ore at cheaper prices following the collapse in the global economy.

Chinese mills have mostly paid lip service to longer-term pricing, citing benefits for the industry's stable development, while they have been willing to switch to spot pricing in the past.

Platts 62-percent grade index prices from June to August stood at an average $175.63 a tonne, down marginally from $176.96 in March-May, the basis for third-quarter pricing.

BHP Billiton, the world's No. 3 iron ore miner, said it has not had any shipment to China cancelled or renegotiated in the last few weeks.

An industry source said BHP has not made changes to its pricing periods as it already prices its ore close to the period of delivery, instead of using previous quarter's prices.

Unlike BHP, Vale and Rio Tinto still price the majority of their contracts on a quarterly basis.

(sourced Reuters)