Monday, 31 Oct 2011
Reuters reported that a slide of 34% in spot iron ore prices since September is spurring another shift in pricing the steelmaking material on shorter contracts within a year after the industry moved to a quarterly system after 40 years of setting rates annually.
The slump highlighted the flaws of a system that prices contracts based on the previous quarter spot rates with a one-month lag and opened the door for a more flexible mechanism for top market China while it deals with weakening steel demand.
Top iron ore miners Vale, Rio Tinto and BHP Billiton fought hard for several years to push mills off fixed-price annual deals and shift to a system that more closely mirrored market conditions.
Mr Marcus Randolph CEO of BHP ferrous and coal division said before the recent price slide, Vale and Rio Tinto had been selling the bulk of their ore via quarterly contracts although BHP Billiton was selling an overwhelming majority of its iron ore using a monthly pricing mechanism.
1. Rotterdam iron ore mechanism
Iron ore prices from after World War Two were dominated by Europe and the Rotterdam Iron Ore mechanism, with prices settled from the start of January to coincide with the European financial year.
Europe steelmakers led by ThyssenKrupp and later joined by Arcelor settled annual deals with miners in Canada, Liberia and Brazil for ore on a cost insurance freight basis for the port of Rotterdam from which ore trains went to Ruhr Valley steel mills.
2. Rise of Asian steel industry
The annual system where the first deal between a miner and steel mill constitutes a benchmark was born in the late 1970s and early 1980s, with the growth of Japan steel industry and the rise of Brazil as a miner.
In the late 1970s, Japan's rising importance as a steelmaker prompted its industry, led by Nippon Steel, to seek alternative ways to secure supplies for the mineral-poor nation.
Many Japanese steel mills had their own ships, so the new benchmark was free on board and contract terms matched the start of the Japanese financial year in April with US dollar prices.
The contracts were based on longer term supply deals typically 10 years with annual talks focusing on prices and adjustments to the long term supply schedule. That gave the steel industry long term security of supply crucial because of the expense and complexity of shutting down and restarting blast furnaces. But it also gave miners an incentive to invest in expensive long term mine development.
From 1980 to 1988 the two systems ran in parallel with the European mechanism tending to set the tone for the later Japanese contract but in the late 1980s the Asia benchmark gradually took over. In the 1990s Japan pushed ahead, settling usually with one of the two main Australian miners, but the emergence of China as a steel superpower, consuming half the world's iron ore, has thrown the annual talks into chaos in recent years.
3. Negotiations were cordial
Talks typically kicked off in November. A handful of mining firm representatives sat down with a buyer to prepare for the next year. Negotiators laid out assessments of supply and demand based on macroeconomic data and industry data such as inventories and spot market ore and steel prices to support their positions.
The talks continued in great secrecy at hotels and conferences around the world until a deal was finally struck. The atmosphere at the meetings was invariably cordial, observers said, more like a meeting of diplomats than the grudge match suggested by the rhetoric of recent years.
Participants had to walk a delicate tightrope to avoid extreme settlements that might have disrupted the market in the future.
(Sourced from Reuters)
Reuters reported that a slide of 34% in spot iron ore prices since September is spurring another shift in pricing the steelmaking material on shorter contracts within a year after the industry moved to a quarterly system after 40 years of setting rates annually.
The slump highlighted the flaws of a system that prices contracts based on the previous quarter spot rates with a one-month lag and opened the door for a more flexible mechanism for top market China while it deals with weakening steel demand.
Top iron ore miners Vale, Rio Tinto and BHP Billiton fought hard for several years to push mills off fixed-price annual deals and shift to a system that more closely mirrored market conditions.
Mr Marcus Randolph CEO of BHP ferrous and coal division said before the recent price slide, Vale and Rio Tinto had been selling the bulk of their ore via quarterly contracts although BHP Billiton was selling an overwhelming majority of its iron ore using a monthly pricing mechanism.
1. Rotterdam iron ore mechanism
Iron ore prices from after World War Two were dominated by Europe and the Rotterdam Iron Ore mechanism, with prices settled from the start of January to coincide with the European financial year.
Europe steelmakers led by ThyssenKrupp and later joined by Arcelor settled annual deals with miners in Canada, Liberia and Brazil for ore on a cost insurance freight basis for the port of Rotterdam from which ore trains went to Ruhr Valley steel mills.
2. Rise of Asian steel industry
The annual system where the first deal between a miner and steel mill constitutes a benchmark was born in the late 1970s and early 1980s, with the growth of Japan steel industry and the rise of Brazil as a miner.
In the late 1970s, Japan's rising importance as a steelmaker prompted its industry, led by Nippon Steel, to seek alternative ways to secure supplies for the mineral-poor nation.
Many Japanese steel mills had their own ships, so the new benchmark was free on board and contract terms matched the start of the Japanese financial year in April with US dollar prices.
The contracts were based on longer term supply deals typically 10 years with annual talks focusing on prices and adjustments to the long term supply schedule. That gave the steel industry long term security of supply crucial because of the expense and complexity of shutting down and restarting blast furnaces. But it also gave miners an incentive to invest in expensive long term mine development.
From 1980 to 1988 the two systems ran in parallel with the European mechanism tending to set the tone for the later Japanese contract but in the late 1980s the Asia benchmark gradually took over. In the 1990s Japan pushed ahead, settling usually with one of the two main Australian miners, but the emergence of China as a steel superpower, consuming half the world's iron ore, has thrown the annual talks into chaos in recent years.
3. Negotiations were cordial
Talks typically kicked off in November. A handful of mining firm representatives sat down with a buyer to prepare for the next year. Negotiators laid out assessments of supply and demand based on macroeconomic data and industry data such as inventories and spot market ore and steel prices to support their positions.
The talks continued in great secrecy at hotels and conferences around the world until a deal was finally struck. The atmosphere at the meetings was invariably cordial, observers said, more like a meeting of diplomats than the grudge match suggested by the rhetoric of recent years.
Participants had to walk a delicate tightrope to avoid extreme settlements that might have disrupted the market in the future.
(Sourced from Reuters)
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