Dow Jones quoted officials with three large Chinese steel mills said several Chinese steel makers have taken advantage of a new iron ore pricing option from global iron ore miners including Brazilian Vale SA and BHP Billiton Ltd amid falling spot iron ore prices and depressed steel prices in China.
These steelmakers have chosen to base quarterly iron ore prices on average prices for the current quarter rather than the preceding quarter, a calculation method that lets them benefit faster from falling prices.
Steelmakers will have to buy iron ore from Vale at around USD 175 per tonne in the fourth quarter according to previous contracts while the spot market prices in the recent week would suggest a price of about USD 160 per tonne.
An official with one of China top steelmakers by output on condition of anonymity said "From the fourth quarter this year, we will purchase iron ore from Vale and BHP on quarterly contracts which are based on the average spot market prices in that quarter instead of prices in the preceding quarter."
He said that purchases from Rio Tinto PLC will still be based on monthly contracts.
He added that "Actually, you have the right to chose contracts based on the average spot prices in the current quarter, previous quarter or even the next quarter. The options have been there for a long time but different steelmakers had chosen differently until now."
The downside is that costs for steelmakers will rise immediately too if prices continue to increase in the current quarter.
The miners are providing the new pricing option to ensure the steel makers don't delay their purchases and potentially hurt mining revenue.
(Sourced from Dow Jones)