The rising raw material costs and
weak global Steel market have cut huge margins from majority of the
steel makers, this has prompted China and many steel makers to review the
present pricing system of iron ore.
But, the question that arises in
everyone’s mind is that would the new system really help? Some analysts and
market insiders frowned at this question because in 2010, Vale, BHP Billiton
and Rio TInto abandoned their 40 years custom of annual pricing system in favor
of quarterly Iron Ore contracts as spot prices gained.
According to Bloomberg data, the
top three producers control about 67 percent of the total seaborne trade, and
their above move hasn’t helped much in favor of this cause.
According to CISA, more than 20
iron furnaces and 20 rolling plants in China’s Hebei region have shut down
their operations due to plunging steel prices and rising raw material costs.
The primary call is for a short
period pricing method, closer to the spot market prices. For years iron ore
prices have been reviewed on an annual basis, giving way to large price swings
and variations in the meantime.
Recently China, the world’s
biggest iron ore buyer held talks with Vale SA, Rio Tinto Group and BHP Billiton
Ltd. to set up a new pricing mechanism after a plunge in cash market prices.
Iron ore prices recently fell 32
percent mainly on China’s policy tightening and weakened global Steel demand
from construction and automobile sectors.
A report from Morgan Stanley
analysts predicts that Iron Ore prices may drop to as low as $95 a
metric ton, the lowest in more than two years, in the short term before
rebounding next year.
Vale, the largest iron ore
producer recently said that most Chinese customers are seeking to replace
quarterly contracts with spot pricing.
However, many analysts have
raised a question that why steel makers are not urging for a futures trade in
iron ore at LME or some other major exchange which could easily set benchmark
prices for the commodity reflecting the steel market prices and why not trade
on it.
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