Iron ore price negotiations - Shorter contracts may affect miners

Tuesday, 08 Nov 2011

Iron ore prices have been sliding in the spot market over the past few months as a result of weak demand. In response to this, industrial customers for iron ore are asking for shorter iron ore shipment contracts that are priced closer to the spot market prices.

Historically, iron ore prices have been relatively stable and most contracts have been annual contracts that were generally priced based on the average spot price in the previous year. However, in order to take advantage of the sharp increase in iron ore prices in the past few years, miners decided to move to a quarterly contract system, whereby the contracts would be priced based on the average price in the preceding quarter. Moving to a quarterly contract system helped the companies’ margins when raw material prices went up.

However, in the past few months, the trend has reversed and iron ore prices are slipping due to a fall in the demand. Steel manufacturers, the largest consumers of iron ore, have started to demand even shorter-term contracts, with some Chinese buyers entering into monthly contracts.

The slowing economic growth in China has been a primary driver of the decline in iron ore prices. Rio’s contracts are priced an estimated 23% higher than the prevailing spot market price, and 86% of the company’s contracts are priced quarterly. Should the company begin offering monthly contracts to gain higher volume, margins would likely take a big hit. We see iron ore becoming an over-supplied commodity in the near-term as Chinese iron ore production rises over the next few years.

Miners also differ in their take on these new contract requests BHP Billiton is already selling majority of its Iron Ore on monthly contracts, while Vale sees no need to move away from quarterly contracts. Rio Tinto currently enjoys a healthy margin from iron ore sales, but we expect that to decline going forward.

(sourced SeekingAlpha)

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)

China Seeks New Iron Ore Price Model, Holds Talks With Miners

Monday,Oct 31,2011 |By Bloomberg News

China, the world’s biggest iron ore buyer, said it’s held talks with Vale SA (VALE3), Rio Tinto Group and BHP Billiton Ltd. (BHP) to set up a new pricing mechanism after a plunge in cash market prices.

“We hope to build a new stable, transparent, fair and reasonable pricing mechanism,” Zhang Changfu, vice chairman and secretary general of the China Iron and Steel Association, told reporters today in Beijing. “We wish to make it more well- organized and healthy.”

Iron ore prices for immediate delivery fell 32 percent this month on China’s credit tightening and slowing steel demand from builders and automakers. Most Chinese customers are seeking to replace quarterly contracts with spot pricing, the largest ore producer, Vale, said last week.

Baoshan Iron & Steel Co., China’s biggest mill, is in talks with Vale on fourth-quarter ore prices, and expects its raw- material costs to drop under a new pricing model, General Manager Ma Guoqiang said today in a webcast meeting with investors. He didn’t provide further details on the new model.

Vale, together with BHP and Rio, in 2010 abandoned a 40- year custom of setting prices annually in favor of quarterly iron ore contracts as spot prices gained. The quarterly contracts are based on a three-month average of spot price indexes for the period ending a month before the onset of the new quarter.

Accelerating Moves

The plunge in iron ore prices is accelerating a move to shorter pricing methods and closer to spot, Rio’s Chief Executive Officer Tom Albanese told analysts last week. Rio, the second-largest iron ore producer, sold about 86 percent of its output on a quarterly basis, he said.

BHP, the world’s largest mining company and third biggest iron ore producer, is selling the “vast majority” of its iron ore on monthly prices, Chief Executive Officer Marius Kloppers said this month. The top three producers control about 62 percent of the total seaborne trade, according to Bloomberg Industries.

Iron ore prices may drop to as low as $95 a metric ton, the lowest in more than two years, in the short term before rebounding next year, Morgan Stanley analysts Peter Richardson and Joel Crane said today in an e-mailed report. They traded at $116.90 a ton on Oct. 28, according to The Steel Index Ltd. and have fallen for 15 days, the longest streak since July 2010,

’Turning Point’

The “turning point” of a global iron ore shortage may come at the end of next year or 2013 as new mining projects come on stream, Baoshan’s Ma said today. The company had previously forecast the market to move into surplus in 2014.

Rising competition and raw material costs squeezed profit margins for China’s medium and large steelmakers to 2.53 percent in September and 2.99 percent in the first nine months, Ma said. Shanghai-based Baoshan’s profit fell 51 percent to 1.24 billion yuan in the third quarter from a year ago, the company said Oct. 28.

Chinese prices of hot-rolled coil, a benchmark product, gained 2.2 percent last week, the first weekly gain since the start of September, narrowing the price decline to 13 percent in the past two months, according to researcher Beijing Antaike Information Development Co.

China’s Hebei province, the biggest steelmaking region, has shuttered more than 20 iron furnaces and 20 rolling plants, partly because of the price plunge, CISA’s Zhang said today.

ASSOCHAM against long-term iron ore export contracts by NMDC

Tuesday, 04 Oct 2011

ASSOCHAM has opposed the move of signing long-term export contract of iron ore with Japan and Korea by the National Mineral Development Corporation particularly in the context of current crisis.

In a representation to the central government, the chamber has stated that we should not be allocating the national resources for meeting the requirements of steel makers abroad without fulfilling the domestic requirements.

Mr D.S. Rawat secretary general of ASSOCHAM said that 40 million tonnes of iron ore production has already been reduced from the total iron ore production of the country subsequent to the orders of Supreme Court to ban the mining activity in Bellary, Chitradurga and Tumkur district in the State of Karnataka.

He further said “This has created acute shortage of iron ore and led to stoppage of almost all the sponge iron plant in Karnataka and neighboring state and most of the iron and steel plants are operating only at 30% to 50% capacity utilization and are on the verge of complete closure.”

Anglo-American settled coking coal contracts with Japanesemills at US$330/t FOB (+47% QoQ) v/s expectation of US$325/ton

Iron ore softens amid weak steel market; coking coal contracts up 47% - Motilal Oswal

Wed, Mar09, 2011 03:03:32

Steel prices in most regions softened during the week. Indian CR grade HRC declined 0.5% WoW and commodity grade HRC was flat.

Spot iron ore prices declined 7% WoW. India's increasing export duty on iron ore fines from 5% to 20% did little to support iron ore prices.

According to media reports, Anglo-American settled coking coal contracts with Japanese mills at US$330/t FOB (+47% QoQ) v/s expectation of US$325/ton.

New prices will hit the P&L of steel companies with a lag of one or two quarters depending on spacing of contacts.

We expect margins to expand in 4QFY11 and remain superior in 1QFY12 followed by compression in 2QFY12.

JSW Steel reported crude steel production of 541,000, an increase of 8% YoY. This is marginally lower than our expectation. Production of HRC and rolled products was robust, and long products appear to be weak. Base metal prices increased 2-3%. Aluminum prices rose on falling inventories. Copper declined on rising oil prices and escalating violence in North Africa.
(Source: Equity Bulls)

Tags : Japan steelmakers, raw material, steel mills

Price negotiation of iron ore on halt

Friday, Feb25, 2011

Iron ore price negotiations are nearly in a coma, for iron-ore mining company BHP Billiton Ltd. (BHP) has already fixed a high proportion of its iron-ore business for 2011 onwards on a monthly price basis in January, breaking away from the quarterly global contract system, said Luo Bingsheng, former vice secretary general in China Iron &Steel Association (CISA) Wednesday during a meeting in Beijing.

The free on board (FOB) iron ore price offered from BHP to Chinese steel makers increased from $155 per ton to $168 per ton. Though other iron-ore mining giants have not clearly followed BHP's step, their price will inevitably raise, added Luo.

Due to various factors, such as China's great demand of iron ore, India's iron ore export limitation and Australia's disastrous flooding, the iron ore price in 2011 will experience a strong upward shot, and in the second and third quarters, the growth rate may be of 10 percent, said the .

Decreasing the dependence on imports is a way to dodge such surprises, said Luo.

China has an iron ore reserve of 150 million tons due to its investments and cooperations with overseas companies of the field. And the country has also put effort into enlarging its own production capacity.

In two to three years, China's demand and supply of iron ore will be balanced, and then its ability to negotiate on price will resume, said Luo.(CHINA.CN)

Tags:Indian iron ore, demand and supply, raw material