As the miners and Chinese steel mills are locked in acrimonious negotiations over the benchmark iron ore prices for the current season which began this month, some developments have taken place in the meantime, leading us to believe that the mineral will be traded more as a combination of spot prices and swap contracts than in reference to benchmark rates the coming days.
At the turn of the millennium, hardly 15 per cent of the seaborne trade in iron ore was linked to spot market prices. Last year, spot sales accounted for as much as 40 per cent of the global ore trade. Steel makers, feeling the bite of demand recession, particularly from the automobile and construction sectors from August onwards, had to go on cutting prices of their products, both long and flat.
Fall in steel prices by more than half from their July highs and some major production cuts across the globe made steel makers to procure larger quantities of ore from the spot market, where prices faithfully reflect the changes in market reality. No doubt, this year will see a further rise in spot market’s share of the world trade in ore as the miners are contending with an oversupply situation and a turnaround in the steel market is not expected before the year-end.
As Chinese steel makers made it abundantly clear as early as December that they were not to buy ore at settled benchmark rates and demand for the mineral shrank in Europe and elsewhere, the miners had no option but to learn to live with the reality. It is no secret that BHP Billiton is selling ore at spot rates, which are at a discount of 35 per cent over the 2008-09 benchmark prices.
Some Chinese steel groups have let it be known that they are buying spot ore at even more attractive rates. China imported 130 million tonnes of ore in this year’s first quarter against 440 million tonnes in 2008. Falling spot prices and also rumours that Beijing is considering a new economic stimulus package on top of the 4 million yuan ($586 million) package announced in November encouraged big ore imports.
China admits that the ore import rush has caused a loss of well over $1 billion as the spot mineral prices were down at least $20 a tonne since February to $60 a tonne. Yet another point of concern is that ore stockpiles at ports have risen to over 70 million tonnes.
In a somewhat intriguing development, Brazil’s CVRD, which as far as one remembers, opposed any move away from the benchmark prices. It has not only started offering more ore for spot sales, but it has also extended a 20 per cent discount to last year’s prices until the benchmark for the current season is agreed upon. Many think the latter move is a result of the world’s largest ore producer coming to terms with the reality that spot prices and swap contracts will continue to gain in importance.
Two leading European banks made available an off-exchange market platform for trade in iron ore swaps a year ago. As this platform is slowly gaining popularity, the Singapore Stock Exchange has just launched over-the-counter swaps contracts.
All these are pointers that benchmark ore prices have seen their best times. Even then the miners and Chinese steel makers, who moved to the negotiating table rightly replacing the Japanese a few years back, have remained locked in some bitter negotiations over the 2009-10 benchmark prices.
R K Sharma, director general of Federation of Indian Mineral Industries, says, “Whatever the outcome of the negotiations, we shall be seeing the 2009-10 benchmark prices falling after six consecutive years of increases.” In any case, Indian private exporters have a preference for spot deals.
China Steel and Iron Association (CSIA) wants the benchmark prices to be rolled back to the 2005 levels due to the lean demand for the metal. A spokesperson for CSIA says, at this point “every single steel maker in China is making a loss.” The demand for this kind of rollback in prices has expectedly caused a deal of concern among miners, particularly Vale.
Interestingly, in order to break the impasse, China has now floated the idea that benchmark prices can be settled every quarter giving credit to steel market fundamentals. Let’s see how the miners react to the suggestion.
