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Friday, November 4, 2011

Arcelormittal ponders iron ore pricing

Fri, November 04, 2011 8:20AM

ARCELORMITTAL, the world's largest steelmaker, is evaluating the possibility of changing the pricing mechanism of its long-term iron ore supply contract but doesn't necessarily expect it will follow the same route as its Chinese peers, the company's chief executive said yesterday.

"Whether it should be spot or ... quarterly ... we are in the middle of evaluating these things," Lakshmi Mittal told analysts in a conference call.

Mr Mittal’s comments come as an iron ore and steel pricing specialist said iron ore spot market prices may have bottomed out following a slump in October.

Brazilian mining company Vale, the world's biggest iron ore producer, said last week it's negotiating on an individual basis with its clients to ascertain what kind of pricing system they prefer following recent market turbulence in the pricing of iron ore, a key steelmaking raw ingredient.

Vale said it's prepared to compete on the iron ore spot market rather than sell ore on contracts if that's what clients want, but customers would have to stick to their decision.

Some steelmakers are calling for a more flexible pricing system, which could help them enjoy the recent iron ore price drop but by the same token face the possibility of greater exposure to fluctuating iron ore prices down the road. In late October, prices of spot iron ore delivered into China plunged to the lowest level since the height of the global economic crisis, according to The Steel Index.

Chinese steelmakers have been quite aggressively showing their preference for a system closer to the spot price, while the Europeans and Japanese tend to prefer contracts that may give greater stability, Vale's executive strategies director Jose Carlos Martins said last week.

"Our customer requirements, our markets are different ... than the Chinese steel industry," Mr Mittal said. "So we'll have to keep all this in mind ... (when we) decide the best course of action in next weeks and months based on what creates the most value for ArcelorMittal," he added.

ArcelorMittal is one of Vale's largest long-term customers. The steelmaker signed a contract in 2008 with Vale to purchase 480 million tonnes of iron ore and pellets over a period of ten years. The contracts were signed in terms of volume and not price.

Since then the iron ore market has undergone a revolution in its pricing system. The annually negotiated pricing system gave way in April 2010 to a quarterly pricing system based on spot iron ore prices and in the case of BHP Billiton, has moved to even shorter-term contracts.

Mr Mittal said he prefers a pricing system that provides a "stable pricing environment".

"Iron ore prices have ticked up $US1 to $US2 every day this week to reach $US122.70 a tonne delivered into China today," said Steven Randall, managing director of London-based price discovery service The Steel Index in an interview.

"This isn't a stellar recovery but it's consistent. There's buying interest at these levels."

On October 28 prices of spot iron ore delivered into China plunged to $US116.90 per tonne, the lowest level since December 2009 at the height of the global economic crisis, according to The Steel Index. Prices slumped 31 per cent in the month of October alone, as increased spot market supplies of the steelmaking raw material, particularly from Australia, encountered only lukewarm buying interest from Chinese mills due to a continuing weak steel market in China, reported The Steel Index's China-based specialist Oscar Tarneberg.

Record high iron ore output from both Australian and Brazilian miners in the third quarter "coincided with the introduction of steel production cuts in China."

The outlook for iron ore prices for the rest of November still looks uncertain as there's potential for Indian exporters to sell more onto the international market after the recent lifting of an export ban on iron ore produced in India's Karnataka region, according to Mr Randall. At the same time, China may ease its restrictive credit policies if local inflation slows, which could stimulate local demand from steelmills, he said.

The precipitous fall in iron ore prices over the past month has left spot prices around $US60 a tonne below the quarterly contract prices being paid by steelmakers for the October-December period, according to a report by Tarneberg published yesterday. As a result, Chinese mills have been looking to renegotiate their contracts for the quarter while Japanese, Korean and Taiwanese mills have said they will remain on quarterly agreements.

Spot market iron ore prices touched their highest-ever level of $US191.90 a tonne in mid-February on robust demand before the current round of market volatility began, according to The Steel Index.

(sourced Dow Jones Newswires)
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