Mon Oct 17, 2011
* Vale seeks to bring quarterly price closer to spot
* Iron ore prices weakening as demand softens
RIO DE JANEIRO Oct 17 (Reuters) - Brazilian mining giant Vale could alter iron ore contracts to make quarterly prices more closely match spot prices, a market source told Reuters, as a weakening global economy cuts into demand for the steel-making ingredient.
The quarterly iron contracts are based on the average of spot prices over a three-month period ending a month before the start of each quarter.
Vale could change a clause which says the contract price will remain the same from one quarter to the next unless the change in the spot price average is greater than 5 percent -- a clause that hurts buyers in times of falling prices.
"I spoke with Vale in recent weeks and they said they could review that clause," said the source, who asked not to be identified. A Vale spokeswoman said the company had no comment on the issue.
Without this provision, iron ore prices for the fourth quarter contracts would be 1 to 2 percent lower.
The fourth quarter price of $175 per tonne is now considerably above the spot price , which on Monday was close to a 12-month low at $153.40.
Sources at steel mills in top iron importer China last week said ore miners including Vale have given mills the option to buy the raw material at prices below the fourth-quarter price following the tumble in spot rates.
When spot market rates are below contract rates, steel mills and traders move toward the spot market and begin pressuring iron miners to lower the contract price.
A similar situation caused the demise of the benchmark pricing system, which was based on annual negotiations between miners and steel mills. Chinese buyers in 2008 and 2009 abandoned benchmark contracts to buy cheaper spot ore, then returned to benchmark contracts when spot prices rose again.
That led the miners to scrap the benchmark system and create a quarterly mechanism based on spot-price averages.
BHP Billiton , the world's No. 3 iron ore miner, is calling for a global trading platform for spot prices and the use of derivatives to bring greater transparency to the iron ore market. It is backing the creation of an electronic trading platform for iron, which it hopes will be launched at the end of 2011 or in early 2012.
(sourced Reuters)
* Vale seeks to bring quarterly price closer to spot
* Iron ore prices weakening as demand softens
RIO DE JANEIRO Oct 17 (Reuters) - Brazilian mining giant Vale could alter iron ore contracts to make quarterly prices more closely match spot prices, a market source told Reuters, as a weakening global economy cuts into demand for the steel-making ingredient.
The quarterly iron contracts are based on the average of spot prices over a three-month period ending a month before the start of each quarter.
Vale could change a clause which says the contract price will remain the same from one quarter to the next unless the change in the spot price average is greater than 5 percent -- a clause that hurts buyers in times of falling prices.
"I spoke with Vale in recent weeks and they said they could review that clause," said the source, who asked not to be identified. A Vale spokeswoman said the company had no comment on the issue.
Without this provision, iron ore prices for the fourth quarter contracts would be 1 to 2 percent lower.
The fourth quarter price of $175 per tonne is now considerably above the spot price , which on Monday was close to a 12-month low at $153.40.
Sources at steel mills in top iron importer China last week said ore miners including Vale have given mills the option to buy the raw material at prices below the fourth-quarter price following the tumble in spot rates.
When spot market rates are below contract rates, steel mills and traders move toward the spot market and begin pressuring iron miners to lower the contract price.
A similar situation caused the demise of the benchmark pricing system, which was based on annual negotiations between miners and steel mills. Chinese buyers in 2008 and 2009 abandoned benchmark contracts to buy cheaper spot ore, then returned to benchmark contracts when spot prices rose again.
That led the miners to scrap the benchmark system and create a quarterly mechanism based on spot-price averages.
BHP Billiton , the world's No. 3 iron ore miner, is calling for a global trading platform for spot prices and the use of derivatives to bring greater transparency to the iron ore market. It is backing the creation of an electronic trading platform for iron, which it hopes will be launched at the end of 2011 or in early 2012.
(sourced Reuters)
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