Annual contract system collapses
By Javier Blas 2010-03-31
For decades, iron ore was plentiful, prices were stable and mining the commodity was a monotonous and unglamorous business.
That began to change in the early 2000s when China’s huge steel needs transformed iron ore into the “unobtainium” of the global commodity market. Prices began to soar and, as they did so, the annual pricing system that had served as a benchmark for four decades began to be questioned.
That process reached its conclusion yesterday when miners and steelmakers ditched the system of annual contracts and long negotiations that had been in place since the 1960s for new short-term deals based on the spot market.
“This is a momentous occasion,” says Melinda Moore, a commodities analyst at Credit Suisse in London. “The industry is revolutionising the way iron ore is priced.”
The revolution comes as the economic and geopolitical importance of commodities is rising because of the large needs of countries such as China and other developing countries in Asia, the Middle East and Latin America.
The change is not, however, a new phenomenon in commodities markets. Iron ore is simply following other examples, such as the transformation in the crude oil pricing system in the late 1970s, aluminium in the early 1980s and, more recently, thermal coal in the early 2000s.
All those markets evolved from being largely fixed or with prices set annually into contracts linked to the spot market. At a later stage, the commodities also developed derivatives contracts, with consumers and producers hedging the risk of volatile prices with over-the-counter swaps and, later, futures contracts.
Alberto Calderón, chief commercial officer at BHP Billiton in Melbourne, says iron ore is becoming a “normal” commodity. “The price system is moving to where other commodities have already moved in the past,” he told the Financial Times.
The “normalisation” comes as the size of the internationally traded iron ore market swells. The seaborne market almost doubled to more than 900m tonnes last year, up from 450m tonnes in 2000. Crucially, China’s share jumped to about 70 per cent, up from 16 per cent a decade ago.
The strong growth has prompted the emergence of a relatively large spot market, accounting for at least 10 per cent of the total trade, according to conservative estimates. That development has proved pivotal to changing the pricing system as steelmakers and miners could price their contracts against the spot market. Nonetheless, some steelmakers, particularly in Europe, question whether the spot market truly reflects supply and demand fundamentals. The miners say it does.
Under the traditional iron ore pricing system, the first price agreed between a miner and a big steelmaker during the annual negotiations became a benchmark followed by the rest of the industry for a year.
Because the cost of iron ore filters into steel prices and, ultimately, into the cost of everyday goods, the annual talks were important for the global economy.
The new price system is a radical departure. It uses quarterly contracts, rather than annual deals, and the cost is set against an average of the spot market level instead of through negotiations.
For next quarter, mining and steel executives calculate that leading steelmakers would pay about $110-$120 a tonne for their ore supplies, an 80-100 per cent increase from the $60 level at which the 2009-10 annual contracts were settled.
The price will change again the following quarter, reflecting the spot market. Each steelmaker will use its own formula to calculate the new prices, executives say.
For example, the Japanese steelmakers’ price for the next quarter is based on the average spot price of the December-January- February period of about $119.3 a tonne. Excluding the freight cost of about $11 a tonne, the final price is about $108.
On the other hand, the Chinese mills, including Baosteel, are in general using the average of the first quarter to price the second quarter, executives say.
The January-March average is $131 a tonne. Excluding the freight cost, the Chinese price equals about $119 a tonne for the second quarter .
The move to use spot prices would particularly favour Rio Tinto and BHP Billiton, as shipping costs from Australia to China are less than half those from Brazil where Vale, the world’s other main iron ore supplier, is based.
The steelmakers’ costs are likely to increase even further during the summer as spot prices continue to rise. Spot Australian benchmark iron ore – 62 per cent iron content – yesterday rose to a fresh 18-month high of $153.6 a tonne.
But Pedro Galdi, mining analyst at SLW Corretora, a São Paulo brokerage, says the new rolling contracts could hurt the miners if demand wanes. “The spot market price is determined by Chinese demand. If China stops buying, the spot price will fall and miners will have to accept lower prices,” Mr Galdi said. “What about next year? Everybody is investing to increase capacity, so later on supply could overtake demand.”
So far, the miners appear relaxed about the prospect. On the one hand, they anticipate a strong market because of growing steel demand in China and lower domestic iron ore production. India, the world’s third-largest producer, is also restricting output, raising export duties. In addition, Vale, Rio Tinto and BHP Billiton will not see any big expansion in supply for the next two years.
英国《金融时报》 哈维尔•布拉斯 报道 2010-03-31
“这是一个重大时刻，业界正从根本上改变铁矿石的定价方法。”瑞信(Credit Suisse)驻伦敦大宗商品分析师梅林达•摩尔(Melinda Moore)表示。
必和必拓(BHP Billiton)驻墨尔本首席商务官阿尔伯托•卡尔德龙(Alberto Calderón)认为，铁矿石正成为一种“常规”大宗商品。他向英国《金融时报》表示：“铁矿石价格机制正沿着其它大宗商品昔日走过的路线发展。”
采用现货价格进行定价，对力拓(Rio Tinto)和必和必拓(BHP Billiton)格外有利。从澳大利亚到中国的船运成本，还不到从巴西到中国的一半。巴西是另一大铁矿石供应商——淡水河谷(Vale)的所在地。
但圣保罗经纪公司SLW Corretora的矿业分析师佩德罗•加尔第(Pedro Galdi)表示，如果需求减弱，新采用的滚动合约可能会让矿商受损。“中国需求决定了现货市场的价格。如果中国停止购买，现货价格就会下跌，那么矿商就只能接受下跌的价格。明年会怎样呢？大家都在投资扩大产能，所以以后可能会出现供过于求的局面。”