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China Pushing for Iron Ore Pricing Changes - Exec

https://en.steelhome.com [SteelHome] 2011-11-07 08:47:29

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China, the world's biggest consumer of iron ore, is still hopeful that major foreign suppliers will change the way they set their prices, Zhu Jimin, chairman of the Shougang Group, one of the country's biggest steel producers, said on Sunday.

"The miners have expressed a positive attitude (to changing the system) and Chinese steel enterprises should have a positive attitude as well," Zhu, also the chairman of the China Iron and Steel Association (CISA), told reporters on the sidelines of an industry conference.

The big three iron ore producers, Vale of Brazil and Australia's BHP Billiton and Rio Tinto , last year abandoned a decades-old "benchmark" system in which contract iron ore prices were set annually.

They replaced it with a more flexible index-based quarterly system designed to better reflect changes in market conditions and cut out the need for protracted and sometimes acrimonious price negotiations with their customers, particularly those in China.

But the new system has its own anomalies. Steel mills are now paying for ore based on prices set over the June-August period, even though prices have collapsed by around $60 per tonne since then.

CISA vice-chairman Zhang Changfu said at a press briefing last week that the association was currently in talks with the three major iron ore suppliers to reform the pricing system, adding that Chinese steel mills were currently buying ore mostly on a spot price basis.

In 2008, the onset of the global financial crisis sent spot market iron ore prices into a rapid decline, persuading a significant number of Chinese steel mills to default on contracts that were still priced at pre-crisis levels.

Mindful of another round of defaults, miners have this year offered to compromise by setting contract prices based on much cheaper fourth-quarter averages.

China has long complained about the quarterly index-based system, saying that it is vulnerable to speculation and did not serve the interests of the iron and steel industry as a whole. It has also routinely blamed the poor performances of its steel mills on the "monopoly behaviour" of Vale, Rio Tinto and BHP Billiton.

Once the old annual benchmark system was abandoned, most industry analysts believed it would only be a matter of time before buyers and sellers switched entirely to daily index pricing, but China has fiercely resisted such a move, saying it would put struggling mills at the mercy of suppliers and speculators.

Zhu said he hoped the two sides could come out with a better long-term pricing solution, adding that "the big improvement now is that even the miners are thinking carefully about the issue."

"I can't draw the conclusion (that we will see a return to longer-term pricing), but we can only solve this problem by treating it rationally," he said.

Reuters

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