ANNUAL iron ore fixed-price deals look to be teetering on the edge of extinction following BHP Billiton and Vale’s completion of a shorter quarterly contract with Asian steelmakers.
The quarterly contracts were settled at $110-$120 (£72-79) a tonne next quarter, a substantial increase from the 2009-10 annual contracts, which were settled at around $60.
Steelmakers in Europe and China will be concerned by the precedent set in Asia as they launched another round of price hikes to recoup soaring raw material costs.
Japanese steel mills will pay 90 per cent more for iron ore supplies under the deal with top global iron ore producer Vale, still a discount to spot prices but closing a gap with a market that has doubled since September. It is understood Japanese steelmakers Nippon Steel and Sumitomo Metal have also provisionally agreed to buy iron ore from Vale at a similar price.
Rio Tinto, the world’s second largest producer, is known to favour quarterly priced contracts and could now be forced into accelerating its plans to ditch annual prices this year. Sam Walsh, Rio Tinto, chief executive said last week that the “benchmark system was broken”.
“The big one will be if Rio decides to move away to quarterly index pricing,” said DJ Carmichael resource analyst James Wilson. “That will be the end of (annual) benchmarking because Rio has almost all its sales on benchmark contracts.”
For four decades miners and mills have agreed on a single annual price, but the strains on the system as prices became more volatile was clear last year when miners and Chinese mills were unable to settle a single price.
Goldman Sachs, in a report this month, estimated Rio, BHP Billiton and fellow Australian producer Fortescue Metals may be missing out on a combined $20bn in annual revenue by not selling iron ore at cash prices.
Analysts said that the next step for miners and steelmakers would be monthly iron ore contracts but refused to give a timeline or information on how these would be calculated.
BHP BILLITON AND VALE’S GROUNDBREAKING DEAL MARKS THE END OF THE 40-YEAR OLD BENCHMARK SYSTEM OF ANNUAL CONTRACTS
The average quarterly price for steelmakers is about $110-$120 a tonne next quarter.
The average annual 2009-10 contract price was $60 a tonne.