Will new iron ore pricing mechanism help steel makers?
Columns | 2011-11-08 06:50:55 | By Paul Ploumis
The rising raw material costs and weak global steel market have cut huge margins from majority of the steel makers, this has prompted China and many steel makers to review the present pricing system of iron ore
By Truemon Thottathil
The rising raw material costs and weak global steel market have cut huge margins from majority of the steel makers, this has prompted China and many steel makers to review the present pricing system of iron ore.
But, would this really help? many analysts and market insiders frowned at this question because in 2010, Vale, BHP Billiton and Rio TInto abandoned their 40 years custom of annual pricing system in favor of quarterly iron ore contracts as spot prices gained.
According to Bloomberg data, the top three producers control about 67 percent of the total seaborne trade, and their above move hasn’t helped much in favor of this cause.
According to CISA, more than 20 iron furnaces and 20 rolling plants in China’s Hebei region have shut down their operations due to plunging steel prices and rising raw material costs.
The primary call is for a short period pricing method, closer to the spot market prices. For years iron ore prices have been reviewed on an annual basis, giving way to large price swings and variations in the meantime.
Recently China, the world’s biggest iron ore buyer held talks with Vale SA, Rio Tinto Group and BHP Billiton Ltd. to set up a new pricing mechanism after a plunge in cash market prices.
Iron ore prices recently fell 32 percent mainly on China’s policy tightening and weakened global steel demand from construction and automobile sectors.
A report from Morgan Stanley analysts predicts that 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.
Vale, the largest iron ore producer recently said that most Chinese customers are seeking to replace quarterly contracts with spot pricing.
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.
However, many analysts have raised a question that why steel makers are not urging for a futures trade in iron ore at LME or some other major exchange which could easily set benchmark prices for the commodity reflecting the steel market prices and why not trade on it.
But, would this really help? many analysts and market insiders frowned at this question because in 2010, Vale, BHP Billiton and Rio TInto abandoned their 40 years custom of annual pricing system in favor of quarterly iron ore contracts as spot prices gained.
According to Bloomberg data, the top three producers control about 67 percent of the total seaborne trade, and their above move hasn’t helped much in favor of this cause.
According to CISA, more than 20 iron furnaces and 20 rolling plants in China’s Hebei region have shut down their operations due to plunging steel prices and rising raw material costs.
The primary call is for a short period pricing method, closer to the spot market prices. For years iron ore prices have been reviewed on an annual basis, giving way to large price swings and variations in the meantime.
Recently China, the world’s biggest iron ore buyer held talks with Vale SA, Rio Tinto Group and BHP Billiton Ltd. to set up a new pricing mechanism after a plunge in cash market prices.
Iron ore prices recently fell 32 percent mainly on China’s policy tightening and weakened global steel demand from construction and automobile sectors.
A report from Morgan Stanley analysts predicts that 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.
Vale, the largest iron ore producer recently said that most Chinese customers are seeking to replace quarterly contracts with spot pricing.
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.
However, many analysts have raised a question that why steel makers are not urging for a futures trade in iron ore at LME or some other major exchange which could easily set benchmark prices for the commodity reflecting the steel market prices and why not trade on it.