Miners offer cheaper iron ore prices for China's steel makers

Iron ore miners have given steel mills in top importer China the option to buy the raw material cheaper for fourth-quarter contracts, sources at mills said on Friday, following a fall in spot rates to 11-month lows. Quarterly contracts are usually based on the average of index-linked spot prices over a three-month period ending a month before the start of each quarter.
But Chinese mills, with margins cut by lower steel prices, are not keen on paying more than $175 a tonne for iron ore - the fourth-quarter contract rate based on June-August average spot prices - when the current rate is less than $160. Three sources at Chinese mills briefed on the change told Reuters that iron ore miners, such as top producer Vale SA, have offered Chinese mills the option to pay for fourth-quarter supplies based on more current rates.
"We received a letter from Vale asking us for our opinion of changing fourth-quarter pricing to be based on October-December spot rates," said a source with one of China's mid-sized steel mills. "Other miners have also said that they would consider steel mills' interests and have therefore made such moves."
A Vale spokeswoman said the company had no comment on the issue. The move could mean another change to the iron ore pricing system less than two years after the industry abandoned negotiated benchmark rates. It also signals a weakening in iron ore demand amid global headwinds to the economy that could cool growth in China, the world's top steelmaker and steel consumer.
On Thursday, China said its trade surplus fell for a second month in September to $14.5 billion, nearly a fifth smaller than August and less than half of July's result. The declines came as exports grew a slower than expected 17.1 percent compared with a year earlier.
Another official with one of China's largest steel mills told Reuters that his company would still buy iron ore based on index, but with the reference period changed to October through December. Reuters reported on Thursday that Chinese mills were seeking to postpone shipments or renegotiate fourth-quarter iron ore contracts.
China is the world's biggest buyer of iron ore, the biggest money maker for Vale, Rio Tinto and BHP Billiton which together control around two- thirds of the global seaborne market. Around 1 billion tonnes of iron ore is traded in the global seaborne market, with about 20 percent sold in the spot market and the rest via long-term contracts.
"You could also say this reflects real weakness in the iron ore market, the iron ore guys wouldn't do this just because they love their customers," said one analyst who asked not to be identified. Ore with 62 percent iron content, one of the highest commercial grades, fell 1.69 percent on Friday, its fifth-straight daily decline.
It is now at its lowest in 11 months, and has fallen 13 percent since early September. At $157.50 a tonne on Thursday, it is nearly a fifth cheaper than its all time high of $191.90 a tonne reached on February 16. Despite the recent price declines, ore is still more than double the approximately $60 a tonne spot-market price effective in late 2008 at the beginning of the world recession brought on by the US banking crisis.
The debate over pricing options suggests that the quarterly contract pricing system, which the industry adopted last year after scrapping a 40-year-old custom of negotiating a benchmark price every year, may not last for long, traders said. The industry could soon move to a monthly system to more quickly reflect swings in spot prices, they said.
"Because of the price swings in the spot market, the miners are going to have to be a little bit more flexible with their pricing system," said an iron ore trader in Singapore. A number of Chinese customers have reneged on their annual contracts in late 2008 in order to source iron ore at cheaper prices following the collapse in the global economy.
Chinese mills have mostly paid lip service to longer-term pricing, citing benefits for the industry's stable development, while they have been willing to switch to spot pricing in the past. Platts 62-percent grade index prices from June to August stood at an average $175.63 a tonne, down marginally from $176.96 in March-May, the basis for third-quarter pricing. BHP Billiton, the world's No 3 iron ore miner, said it has not had any shipment to China cancelled or renegotiated in the last few weeks.