Can China's steelmills tackle with the increasingly prominent iron ore "finance nature"?
The traditional iron ore contract pricing system is going towards a crossing.
According to information on March 22, international ore miners including Brazil's Vale, BHP Billion and Rio Tinto have concluded the initial agreement with Japan's main steel producers, planning to replace short-term contract with the iron ore pricing system.
Although China Iron and Steel Association stated it has not received the related notice and refused to make any comment, analysts believed that the aforesaid information does not come from nowhere. In the beginning of March, Japan's steelmills first announced to accept the quarterly pricing contract. As the steel-melting raw material like coking coal, the iron ore long-term system is facing the heavy pressure.
Quarterly pricing becomes the breakthrough exit.
In the beginning of March 2010, ore giant BHP Billiton declared that the company has arrived at the coking coal supply agreement with part clients from Europe, China, Japan and India, which is settled according to short-term pricing. Japan's main steel enterprises also confirmed that in accordance with agreement, from April to June, BHP Billiton's coking price will rise to U.S.$200 per ton, up by 55% than 2009 price.
It is learned that it is first time Japan's steelmakers accepted the coking coal quarterly price. However, for international ore miners such as BHP Billion, they will enter more raw material fields. In terms of iron ore, BHP Billiton has always calls on to cancel annual long-term pricing system. In the beginning of 2010, BHP Billiton said that in the fourth quarter of 2009, the company sold out 46% of iron ore at the quarterly price, spot price, index price.
Analysts thought international ore miners probably start with Japan's steelmills to launch the iron ore quarterly price. Japan's steel products is high-end, whose ability of shifting cost is stronger. Their concern about steady iron ore supply is more than price, one person familiar with Japan's steelmills.
China and Europe are cautious about quarterly price. Ministry of Commerce previously stated that they hopes to continue carrying out iron ore long-term price system and provides the trade support.
Iron ore "finance nature" further standouts.
If iron ore transaction is implemented according to quarterly price or close to spot market from 2010 on, for steelmills, it is a concern start, iron ore "finance nature" will gradually standouts.
In contrast with annual contract price, iron ore spot price is more vibrant. In the beginning of the fourth quarter of 2009, the domestic iron ore spot price stood at around U.S.$90 per ton. With the approaching of the new fiscal year long-term pricing starting date (April 1st), the price has increased to U.S.$150 per ton.
If iron ore transaction is carried out according to quarterly price, the future iron ore price will further tend to spot price and index price. To hedge the fluctuation risk of spot market, many steelmakers have to enter finance derivative market.
