Steel industry discussing new iron ore pricing model

Industry News 2010-10-25 08:34:21

Source : Peoples daily online

Published on : 23rd October, 2010
Since defects have been shown in the quarterly index pricing model for iron ore implemented by Vale of Brazil, Rio Tinto and BHP Billiton of Australia, the three world mining giants, a new iron ore pricing model is being discussed, Luo Bingsheng, vice director of the China Iron and Steel Association (CISA), said on Oct. 21 during a meeting held in Hefei, Anhui Province.
Yang Siming, board chairman of Nanjing Iron and Steel United said that due to the sharp increase of iron ore prices, the profit distribution of the iron and steel industrial chain is quite imbalanced, and iron and steel companies almost do not have any right to speak in the negotiations regarding the iron ore pricing model with the three iron ore mining giants.
Luo said during the annual meeting of the World Steel Association held in Tokyo in September that the common opinion of iron and steel enterprises is that the current quarterly index pricing model has made the steel price fluctuate widely, and the price cycle has also become longer and longer.
Since November 2009, the giant iron ore mining companies had proposed that the iron ore pricing mode should be changed. Luo said that the iron and steel companies accepted the quarterly index pricing model during the negotiations because the industry was facing pressure from high demand and low supply. 
Liu Yongshun, a chief negotiator of China's delegation for the benchmark price of iron ore, said on Oct. 21 that there is a trend for the iron ore price to be indexed and financialized, and steel companies should adapt to this trend, but the pricing model still needs to be discussed in depth.
In April 2010, the three mining giants broke with the long-standing tradition of an annual pricing mechanism and officially launched quarterly index pricing. Luo stressed that the price of iron ore was not determined by one of the three mining giants, and it remains to be seen how to determine the price.
Luo pointed out that the quarterly index pricing is not representative and takes the cost, insurance and freight (CIF) price of Chinese iron ore as the base number of the index, accounting for only 20 percent of the actual import volume. In addition, the CIF is collected by telephone. Therefore, there will be a difference between the actual price and the contract price, which may be not scientific.
Luo also said that the influence of the transaction price on the index has not been taken into account. From the global perspective, only China has spot mines and the whether the price is representative also remains to be considered. Luo said that it is still under discussion whether China will launch its own index.
Liu said that index pricing is problematic, but it is the best pricing model at present.
"There needs to be negotiations over supply and demand parties to determine which index pricing should be used," said Xu Xu, chairman of the China Chamber of Commerce of Metals Minerals and Chemicals Importers and Exporters (CCCMC). "Moreover, it is not just related to Chinese steel enterprises, and discussions must also be held with European Iron and Steel Association and mining companies."
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