Vale to compete on iron ore spot market

Sunday, 30Oct,2011

Dow Jones reported that Brazilian mining company Vale SA prepared to compete on the iron ore spot market rather than sell ore on contracts if that's what clients want.

Mr Jose Carlos Martins Vale executive strategies director said however we can't work with a system whereby if iron ore prices fall they want spot prices and if they go up they want fixed contract prices.

He said that "We've got no dogma at Vale on this. We're not high cost producers. We're prepared to compete at spot market prices."

Mr Martins said spot market prices plunged mainly due to credit restrictions in China which are making it more difficult for steelmakers and traders to purchase iron ore supplies.

He said that “Vale is negotiating on an individual basis with its clients to ascertain what kind of pricing system they prefer following recent market turbulence. The Chinese steelmakers are quite aggressively showing their preference for a system nearer the spot price while the Europeans and Japanese tend to prefer contracts which may give greater stability.”

He added that "Our tendency is to accompany market movements. We're going to accept what our customers decide."

Mr Martins said "The Chinese prefer a price nearer the market situation. The market is trending more to spot market prices in what is an almost irreversible move and a return to the annual benchmark system is now completely out of the question."

He said that however Vale isn't prepared to give discounts to customers if they change to a spot-price basis. He said that "It's not a free ride, if customers want spot prices and they must guarantee they will take the volumes already agreed."

He added that "Quarterly contracts are meanwhile bearable for both sides."

Iron ore producers and steelmaking customers worldwide agreed to adopt a quarterly contract pricing system for iron ore in April 2010 after the 40 year old annual benchmark pricing system fell apart during the global economic crisis due to Chinese pressure for cheaper prices near spot market prices.

Sourced from Dow Jones

JFE, Sumitomo sticking to iron ore contracts

Tue Oct 25, 2011 2:54am EDT

* Japan not looking to buy from cheaper spot market
* JFE, Sumitomo: not received offers to cut Q4 iron ore prices

TOKYO Oct 25 (Reuters) - Japanese steelmakers JFE Holdings Inc and Sumitomo Metal Industries Ltd on Tuesday said they would not cancel their October-December iron ore contracts despite a plunge in spot market prices.

As spot prices fell to their lowest in 12 months, Chinese steel mills were seeking to postpone iron ore shipments or renegotiate fourth-quarter contracts, traders said, while top producer Vale said it was open to discussing a different pricing system with clients.

"It is against our creed that we break contracts and shift to spot buying when the market is not good. We believe that raw materials costs should remain stable," Eiji Hayashida, chairman of the Japan Iron and Steel Federation, told a news conference.

JFE had not received an offer from miners to reduce the October-December iron ore price, Hayashida added.

"We'll stick to purchasing contracts irrespective of the ups and downs of the spot market," an official at Sumitomo Metal Industries told Reuters.

Weaker demand for steel in China, the world's biggest consumer and producer, has dragged down steel prices <0#SRB:> and slashed the appetite for iron ore, the key raw material for the industry.

Under the quarterly contract system created last year, iron ore in the fourth-quarter will be priced at more than $175 a tonne, much higher than the current spot market rate of around $142. .IO62-CNI=SI

Hayashida said global financial woes and floods in Thailand may reduce Japan's crude steel output in April 2011-March 2012 by 1 million tonnes to below 108 million tonnes.

Thailand's worst flooding in five decades forced Toyota Motor Corp to suspend production through Oct. 28 due to supply disruptions. Japan's biggest automaker said it had lost production of 37,500 vehicles since output was halted on Oct. 10.

Thailand is Japan's third-biggest export market for steel, followed by South Korea and China, accounting for 11 percent of Japan's steel exports in January-August.

(sourced Reuters)

Analysis: Iron ore giants gamble on long-term Asian demand

Tue Oct 25, 2011

SYDNEY (Reuters) - Iron ore prices are in tailspin -- down 20 percent in the last month and clocking seven straight weeks of losses -- and the world's biggest producers couldn't seem to care less.

Last year's contentious shift away from once-a-year pricing of ore in favor of shorter term contracts is now delivering lower returns on sales of more ore, yet miners appear unworried about the market's gloomy performance, moving full steam ahead on massive expansion projects.

That's because the more iron ore is sold at spot, the less smaller suppliers can compete with the mega-producers -- namely Vale (VALE5.SA), Rio Tinto (RIO.AX)(RIO.L) and BHP Billiton (BHP.AX)(BLT.L) -- who enjoy vast economies of scale and together control more than 70 percent of the global seaborne market.

"The big producers are taking a much longer view on market forces, which takes into account growth projections in China and are gearing up for that by developing more mines," said Grant Craighead, a mining analyst with Stock Resources in Sydney.

Some 86 percent of Rio's third-quarter sales were based on average prices for the preceding quarter -- lower than earlier sales over comparable periods as spot sales increased -- Tom Albanese, chief executive of Rio, the world's No. 2 iron ore producer, told financial analysts in a presentation this week.

"Shipments are strong and we are selling everything we can produce," Albanese said.

Rio is accelerating a program to lift output by 50 percent to 333 million tonnes a year by 2015. BHP is aiming for a 37 percent rise in production to 220 million tonnes by around the same time.

Vale aims to boost yearly iron ore output to 469 million tonnes by 2015 from 308 million in 2010.

The next biggest producers, including South Africa's AngloAmerican (AAL.L) and Fortescue Metals Group (FMG.AX), mine less than 50 million tonnes a year each.

Rio and BHP, more than Vale, have been aggressively selling directly into the Chinese spot market over the last month after running their mines above capacity, further undermining the price.

Such sales came mostly as buyers of lower-grade ore mined in China switched away to exploit the chance of acquiring richer Australia ore at comparable prices. Marginal Chinese domestic iron ore production is now $20 a tonne higher than a couple of years ago, boosted by grade declines and cost inflation.

This helped offset the effects of what many industry players consider to have been a moratorium in China from taking delivery on shipments priced on the contract basis over the second quarter. By most accounts the ban has passed, with mills again in restocking mode.

BHP alone sold eight capesize cargoes of iron ore in 24 hours in September, which Bank of America Merrill Lynch analyst Peter O'Connor called an outcome that would normally have taken several weeks.

Rio's level of averaged-price sales is also outside the norm, driven by its strong production that allowed more sales into the spot market.

Iron ore prices plummeted a further 8 percent last week, the seventh straight week of losses and the sharpest drop since July 2010.

"FORUM SHOPPING"

BHP Chief Executive Marius Kloppers, whose mantra is "run assets at full capacity all the time and achieve market price," defends short-term pricing because it means customers have little reason to dispute or delay shipments.

"I have not seen any of what I saw in the global financial crisis, which was the equivalent of forum shopping, where one party's customers defaulted but bought from another," he said on the sidelines of BHP's annual meeting in London.

Vale, the largest of the three producers, reluctantly discarded the once-a-year-price system after BHP and Rio bowed out, cognizant it would upset customers. In the end it had no choice but to follow suit.

Now, with spot prices trailing the last quarter's average price mark and lead times on Brazilian cargoes to China much longer than the Australian miners, Vale has announced it is open to alternative pricing systems.

UBS commodities analyst Tom Price said Vale had already agreed to a request from customers in China for provisional pricing to remove the quarter-long lag on the spot versus contract price.

This mechanism varies from spot in that it reflects the average spot price for the quarter, not that for any given day.

Vale is leading this move as it remains the most vulnerable to losing volumes, according to Price.

"Lead times on its deliveries are longer, allowing clients to delay decisions on Australian material for longer than with Vale," he said.

UNDER PRESSURE

Already, Chinese steel mills under pressure to maintain sales margins are said to be delaying iron ore purchases on expectations that prices will continue to drop. China steel futures fell more than 5 percent late last week in the contract's steepest decline ever, suggesting such delaying tactics might spread.

Even before China announced slower-than-expected 9.1 percent third-quarter GDP growth, evidence of a slowdown in its steel sector was mounting.

China's road construction is facing unprecedented capital shortages, with some provincial governments failing to pay engineering companies for two to three consecutive months, according to the official People's Daily.

More telling, say analysts, the price of rebar used for construction in China is down 20 percent since August.

Still, such warnings may fall on deaf ears.

"Miners are still seeing a very high profit margin despite falling prices, and they can also take the advantage to beat smaller emerging rivals to retain market share, so why not produce?" asked a senior iron ore trader in Shanghai.

UBS said it sees the spot price correction reversing next month as China's steel producers resume seasonal restocking of raw materials following a summer respite.

Iron ore prices hit a 13-month low around $144 a tonne on Friday, and were unlikely to sink much lower, according to a high-ranking executive at South Korea's top steelmaker POSCO (005490.KS).

"I think the $130 to $140 levels will be a bottom. When prices fall below $130 to $140, China will not produce (iron ore), but import it. I see prices rebounding," the official, who declined to be identified, told Reuters.

Australian forecasting group BIS Schrapnel believes that while volatility is likely to continue over the next five years, healthy Asian demand for iron ore and other commodities is set to continue.

"Rapid economic growth in developing, metals and energy intensive economies such as China and India continues to drive strong demand for Australian resources, despite the prospect of weaker economic growth in Europe and the United States," BIS said in a report.

Not everyone agrees.

Goldman Sachs expects the iron ore price to keep to a downward course through at least 2014, when it will average only $110 a tonne -- a far cry from the record $192 of last February.

"The risk for the big producers now is that prices keep falling and with it goes profit margins," said Stock Resources's Craighead.

Still, the mining companies insist they are more interested in the long haul, unfazed by daily ups and downs in prices and more attuned to the massive growth projections for China in justifying their big spends to ramp up output.

That may eventually prove wise, though it could be a rough course to hold given the over-weight exposure to iron ore these so-called diversified miners hold.

"For a commodity such as iron ore, you're really very focused on the strength of the Chinese economy," said Catherine Raw, a portfolio manager for the natural resources investment division of fund manager BlackRock (BLK.N).

"With over 50 percent of the world's iron ore consumed by China, your outlook for the iron ore price is going to be determined by your outlook for Chinese economic growth."

(sourced Reuters)

Vale may tweak iron contracts as prices fall: source

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)

Dannemora and Stemcor ink long term iron ore supply contract

Monday, 17 Oct 2011

Dannemora Mineral has signed a 5 year off take agreement with Stemcor UK Ltd for the annual supply of up to 40% of production or approx. 600,000 tonnes of iron ore.

Deliveries will commence in 2013.

Mr Staffan Bennerdt CEO & president of Dannemora Mineral said “The agreement is a confirmation that our products are attractive in the market and means that we have now signed contracts for 80% of our production at full operation and secured our sales for 2012 and 2013.”

Singapore SMX iron ore futures volume tops 1 million tonnes in Sept

Wednesday, 05 Oct 2011

Reuters the exchange said reflecting strong interest in the cash-settled hedging tool that the volume of iron ore futures contracts traded on the Singapore Mercantile Exchange reached 1.1 million tonnes in September.

SMX owned by India Financial Technologies, introduced its cash settled iron ore futures contract on August 12. The contract is the world first dollar-priced iron ore futures open to global investors seeking to hedge prices of the steelmaking ingredient.

Last month trading volume represents a fourth of the volume of iron ore forward swaps cleared by rival Singapore Exchange in August which at a record 4.3 million tonnes comprised around two thirds of the global total.

SGX which launched its iron ore swaps in April 2009 said separately on Tuesday that volumes dropped to 7,957 lots in September equivalent to 3.98 million tonnes from 8,564 lots in August.

The world biggest buyer of iron ore, SMX said in a statement that there has been active interest in the SMX contract from players in physical and financial markets including traders based in China

Mr Vaidyalingam Hariharan SMX interim chief executive said in the statement that "Based on the response that the iron ore futures contract is receiving we are confident of creating a robust benchmark for the iron ore industry."

The shift to quarterly pricing for iron ore contracts from annual pricing since April last year spurred interest in hedging instruments as mills and traders managed their costs against spot prices IODBZ00-PLT which have tripled since late 2008.

(Sourced from Reuters)

Singapore's SMX to launch iron ore futures on Friday

Wed Aug 10, 2011 2:17am EDT

* SMX futures contract will be second in the world after India
* SMX contract will be cash-settled, small lot size
By Manolo Serapio Jr

SINGAPORE, Aug 10 (Reuters) - The Singapore Mercantile Exchange will launch its iron ore futures contract on Friday, its interim chief executive said, as the bourse taps into a growing market to hedge prices of the steelmaking raw material.

It will be the world's second iron ore futures contract after two exchanges in India launched the first in January. Unlike the Indian contracts, which are denominated in rupees and are limited to domestic players, the SMX contracts will be priced in U.S. dollars and open to global investors.

The contract will be cash-settled against Metal Bulletin's iron ore index .IO62-CNO=MB and will have a size of 100 tonnes per lot, Vaidyalingam Hariharan told Reuters in an email.

That would be smaller than the 500-tonne per lot size of the widely traded iron ore swaps cleared by rival Singapore Exchange .

"Based on the unique contract design of smaller trading unit, optimal tick size and monthly single day expiry, the physical players of all sizes across the supply and value chain of iron ore can participate in the SMX MBIO Index futures contract for effectively covering their price and counterparty risk," Hariharan said.

Products traded on the SMX, owned by India's Financial Technologies , include WTI and Brent crude oil, gold, silver, copper and currencies.

SMX is targeting market participants from China, India, Singapore, Hong Kong, Japan and South Korea for the iron ore futures contract, said Hariharan.

Spot prices of iron ore with 62 percent iron content traded above $177 a tonne on Tuesday, not far off the record $191.70 touched in mid-February, according to Metal Bulletin's iron ore index.

Booming demand from top consumer China and tight global supplies have seen prices more than triple since late 2008.

The industry's shift to a more flexible quarterly pricing system in 2010 from a decades-old annual scheme increased the appeal of hedging tools like swaps.

The volume of iron ore swaps cleared globally rose to an all-time high of more than 4 million tonnes in July, valued at more than $700 million. The bulk of that, or 3.92 million tonnes, was cleared by the Singapore Exchange.

"Unlike the forward swap contract, the futures contract, once matured will facilitate easy entry and exit options to the participants based on higher price transparency and liquidity," Hariharan said.

Vale expects high iron ore contract prices for rest of 2011: CFO

July29,2011 | sourced Platts


London :Brazilian mining company Vale, posting a succession of record quarterly profits, expects stronger performance in the second half of 2011 as iron ore output is set to increase, demand in China stays strong and prices stay high, CFO Guilherme Cavalcanti said in an interview Friday.

CEO Murilo Ferreira meanwhile told analysts that iron supply will not exceed demand in the next five years.

Vale is currently reviewing the schedules of new mining projects as delays with environmental permitting slows their implementation, Cavalcanti said in an interview from Rio de Janeiro.

"In the second half of the year, prices will be at the same levels, Chinese demand will remain strong, and difficult project execution will mean the market remains tight," Cavalcanti said.

Vale highlights record steel output globally led by China and Chinese iron ore import volumes up on 2010 levels over the first half for its growth expectation. Company chief executive Murilo Ferreira expressed concerns over fiscal issues and the pace of economic growth in the US and Europe in an analyst call Friday, but overall remained positive.

Vale's iron ore pricing formula considered, the average Platts IODEX 62%-Fe ore value of $177.016/dmt CFR North China from March to May in deciding Q3 contract prices.

With one month of spot prices outstanding in determining the average price for the June to August period to help set Vale's Q4 2011 contracts, the average over June to July is around $174/dmt CFR North China.

Cavalcanti said all Vale iron ore fines contract sales are basis Platts IODEX, and negotiations are at an early stage to convert pellet contracts to using similar indices and a Fe-content quality differential and conversion cost factor.

The end of the rainy season in Brazil in Q2 will push up output at its iron ore mines in the remaining six months, he said.

The gains in realized iron ore sales prices in Q2 were resticted by higher moisture content and a slightly lower iron ore grade on average due to heavy rains that extended into May.

The moisture content was 1.5 percentage points higher on average while the Fe-content pared back 0.2 percentage points as rains hampered mining of some areas with higher ferrous content ores to shift the grade mix down, Jose Carlos Martins, executive officer for marketing, sales and strategy told analysts on an earnings call.

SHARE BUYBACK, EXTRA DIVIDEND

The average Q2 sales price of iron ore was $145.3/mt, 15.1% higher than the previous quarter, while the average pellet price was $206.07/mt, 13.6% above Q1.

Vale is performing strong enough that cash flows allow for a recent $3 billion share buyback and $3 billion extra dividend to be paid with enough left to still meet rising costs, obligations and budgets, Cavalcanti said.

Costs are elevated mostly by the appreciation of the Brazilian currency, he added.

Vale in June announced it cut to 469 million mt from prior guidance of 522 million mt its annual iron ore output target for 2015. It produced 297 million mt in 2010.

Cavalcanti said the paring in estimated iron ore output growth was a result of slower project and expansion permitting rather than weakening in demand growth expected from customers.

China, Japan and Germany are the largest export destinations, while Brazil-based sales to steel mills and pelletizers comprise the second-biggest market after China.

Cavalcanti said Vale's project pipeline is under review, including a 90 million mt Serra Sul (S11D mine) expansion in Carajas still seeking a preliminary license. The $6.7 billion project is targeted on stream starting in the second half of 2014.

Celays are putting pressure on Vale meeting its $24 billion capital expenditure budget for 2011 that, after $6.8 billion capex in the first half of the year, leaves over $17 billion left.

"In the second semester, its normal for expenditure to pick up," Cavalcanti said of the July to December period, adding that Ferreira remains committed to boosting investments later this year to meet the allocation.

Vale on Thursday posted Q2 net profits of $6.45 billion, up 74.1% year on year and the largest ever for the period. A $1.5 billion gain from the sale of aluminum assets pushed up Q1 profit to $6.83 billion. It was largely due to higher sales and robust prices for commodities led by iron ore, nickel and copper.

Sales to Asia as a whole accounted for 52% of the total $15.35 billion revenues, up from 49.6% in Q1 2011.

Iron ore production in the quarter reached 80.3 million mt, the highest ever for a second quarter and 5.8% up on Q2 2010.

Pellet production at 13.1 million mt was up 3.8% year on year.

Vale said the first of two pellet plants in Sohar, Oman, has achieved stability at its nominal production capacity and the second plant is expected to start ramping up in the fourth quarter.

In nickel, Vale successfully ramped up the first line of its Onca Puma project in Brazil's Para state, while the second line is under final assembly, it said.

The group's vessel orders for very large iron ore carriers will remain delivered as planned, Cavalcanti said. Vale's strategy is to lower freight costs and current low freight rates that have prompted others to cancel or adapt orders is irrelevant in its case, he said.

Vale to stick to quarterly iron ore pricing

Fri Mar 18, 2011 12:13pm GMT

LONDON, March 18 (Reuters) - Brazil's Vale (VALE5.SA: Quote), the world's top iron ore miner, will not switch to monthly iron ore contract pricing and will stick to quarterly pricing, Vale's global marketing director Pedro Gutemberg said.

"Vale is selling all contracted volumes on quarterly pricing. It is very happy with the quarterly prices and has no intention to switch to monthly prices at this time," Gutemberg told Reuters.

"We believe the three-month period is good enough to avoid major gaps with actual market prices and, on the other hand, smooth volatility of the monthly period."

When the annual benchmark system collapsed in 2010, the top three iron ore miners, Vale, Rio Tinto and BHP Billiton, started to use various pricing mechanisms, based on quarterly indexed-prices.

Top global miner BHP Billiton (BLT.L: Quote) (BHP.AX: Quote) is already selling some iron ore on monthly basis and would like its contract prices to move even closer to the daily market price, a spokesman for the company said.

To price its contracted iron ore, Brazil's Vale uses a quarterly system in which prices are decided by a three-month average of the Platts North China 62 percent FE CFR index IODBZ00-PLT beginning four months before the relevant quarter. (Editing by William Hardy,Reuters)