Steelmakers agree new iron ore contracts

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Global miners have passed a milestone in their efforts to change the way iron ore benchmark prices are set by convincing major steelmakers to adopt prices more closely linked to the spot market.

BHP Billiton said on Tuesday that a “significant number” of Asian steelmakers had agreed to move from the 40-year-old pricing system based on annual contracts toward shorter-term pricing.

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The Anglo-Australian miner, the world’s third biggest iron ore exporter, has lobbied for years to change the pricing mechanism used around the world. Vale of Brazil and Rio Tinto have joined the call more recently.

BHP on Tuesday declined to name the steelmakers that it had signed agreements with or the prices they had settled on. Iron ore is one of the main ingredients used to make steel.

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Nippon Steel has also provisionally agreed to buy iron ore from Vale on a quarterly basis at a price close to 90 per cent higher than the 2009-10 annual contract price, according to a person familiar with the matter.

As the largest Japanese steelmaker, Nippon Steel traditionally represents other Japanese steelmakers in iron ore negotiations. As a result, its agreement with Vale is likely to be adopted by domestic rivals such as JFE and Sumitomo Metal. Its agreement with Vale, the world’s biggest iron ore exporter, would be one of the Brazilian group’s first quarterly pricing deals.

The person with knowledge of the matter on Tuesday said Nippon Steel had provisionally agreed to buy Vale’s iron ore for a price in the range of $100 to $110 a tonne for the three months to June. That would be close to double the $60 a tonne price for the 2009-10 contract.

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Earlier this week, the spot price for iron ore was just over $150 a tonne, or $138 a tonne after stripping out freight costs.

It is unclear whether Chinese steelmakers, now among the biggest consumers of iron ore in the world, will agree to shorter-term pricing in the near future.

Baosteel, which this year is representing China in the iron ore price talks, this month opened the door to a shake-up of the annual pricing mechanism when it said it would be “reasonable” to change the system.

However, a Chinese official on Tuesday reiterated Beijing’s opposition to a change in the pricing mechanism.

“Using the spot market to set prices will bring many risks to steel enterprises,” Jia Yinsong, an official at the Ministry of Industry and Information Technology said at an industry conference. Mr Jia was cited by Reuters as saying China opposed any attempt by the three big miners to abandon the annual benchmark system for iron ore pricing.