By Alex MacDonald, The Australian
October 15, 2011 12:00AM
BHP Billiton plans to create a new, more transparent iron ore pricing system called Global Oreby the end of the year or early next year.
The chief executive of the company's ferrous and coal division, Marcus Randolph, told an audience at the World Steel Association in Paris that he was working with members to develop a pricing system that would allow iron ore prices to be quoted on a screen to provide the market with a more transparent price than index providers such as Platts.
"We have to have that in order to have a viable derivatives market," Mr Randolph said.
"As you try to create a financial market, a derivative market, you actually must have 100 per cent verification of what is the price right now. Global Ore is not based on a reported price; it's visible to people" on a screen real-time, he said.
Global Ore will be modelled on Global Coal, another trading platform BHP has helped set up where consumers and producers offer prices on a website in order to buy and sell thermal coal. Global Ore would be based on a similar ownership model to Global Coal, where both consumers and producers own the trading platform.
Financial institutions would also be able to participate, Mr Randolph said, but he wasn't clear whether that would be as a user or owner or both.
The Global Ore platform initially would allow consumers and producers to trade iron ore fines.
The derivatives market has grown since the world's three largest iron ore miners, BHP Billiton, Rio Tinto and Brazil's Vale, abandoned the annual price benchmarking system in 2009 for shorter term price contracts.
The contracts were set up on a quarterly system, but "most people are finding quarterly is an inconvenient period", Mr Randolph said. As a result, more contracts were now being priced on a monthly basis.
BHP sold more than 50 per cent of its iron ore on a monthly basis and an even higher proportion of its coking coal on a monthly basis, Mr Randolph said.
Only 15 per cent of world iron ore sales and 4 per cent of coking coal sales were done on price contracts longer than a quarter, he said. "The intent of a monthly price is not to negotiate. It's actually to fix the price where the market is. We are not where we have a transparent market, but we certainly have a low volatility market."
Mr Randolph said the Chinese were more willing to engage in short-term price negotiations than the Japanese, whose carmakers preferred annual steel contracts.
Simon Wandke, vice-president and chief commercial officer of Arcelor Mittal's mining unit, agreed with Mr Randolph that there was potential for a more liquid and transparent iron ore derivatives market, but he wasn't certain steelmakers would adopt such instruments given the low level of liquidity and the likelihood that they would cover only a portion of the grades and products in the iron ore market.
(sourced Dow Jones Newswires)
October 15, 2011 12:00AM
BHP Billiton plans to create a new, more transparent iron ore pricing system called Global Oreby the end of the year or early next year.
The chief executive of the company's ferrous and coal division, Marcus Randolph, told an audience at the World Steel Association in Paris that he was working with members to develop a pricing system that would allow iron ore prices to be quoted on a screen to provide the market with a more transparent price than index providers such as Platts.
"We have to have that in order to have a viable derivatives market," Mr Randolph said.
"As you try to create a financial market, a derivative market, you actually must have 100 per cent verification of what is the price right now. Global Ore is not based on a reported price; it's visible to people" on a screen real-time, he said.
Global Ore will be modelled on Global Coal, another trading platform BHP has helped set up where consumers and producers offer prices on a website in order to buy and sell thermal coal. Global Ore would be based on a similar ownership model to Global Coal, where both consumers and producers own the trading platform.
Financial institutions would also be able to participate, Mr Randolph said, but he wasn't clear whether that would be as a user or owner or both.
The Global Ore platform initially would allow consumers and producers to trade iron ore fines.
The derivatives market has grown since the world's three largest iron ore miners, BHP Billiton, Rio Tinto and Brazil's Vale, abandoned the annual price benchmarking system in 2009 for shorter term price contracts.
The contracts were set up on a quarterly system, but "most people are finding quarterly is an inconvenient period", Mr Randolph said. As a result, more contracts were now being priced on a monthly basis.
BHP sold more than 50 per cent of its iron ore on a monthly basis and an even higher proportion of its coking coal on a monthly basis, Mr Randolph said.
Only 15 per cent of world iron ore sales and 4 per cent of coking coal sales were done on price contracts longer than a quarter, he said. "The intent of a monthly price is not to negotiate. It's actually to fix the price where the market is. We are not where we have a transparent market, but we certainly have a low volatility market."
Mr Randolph said the Chinese were more willing to engage in short-term price negotiations than the Japanese, whose carmakers preferred annual steel contracts.
Simon Wandke, vice-president and chief commercial officer of Arcelor Mittal's mining unit, agreed with Mr Randolph that there was potential for a more liquid and transparent iron ore derivatives market, but he wasn't certain steelmakers would adopt such instruments given the low level of liquidity and the likelihood that they would cover only a portion of the grades and products in the iron ore market.
(sourced Dow Jones Newswires)
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