China’s big mills will not source their iron ore from spot markets even if prices turn out to be cheaper, leading Chinese steel maker Baosteel said on Thursday. The new mechanism used by the three big miners — Vale of Brazil and Australia’s BHP Billiton and Rio Tinto — sets prices by calculating the average on the spot market during the previous quarter.
But spot prices have collapsed by about 15 percent since late April, prompting fears among foreign mining giants that their Chinese customers could renege on their contracts. But Baosteel’s chairman, Xu Lejiang, told reporters that big Chinese mills still regarded stability of supply as the most crucial factor as they try to maintain their colossal rates of production using ore shipped from Brazil and Australia. “Spot market prices are currently lower than the prices being offered by the three big miners, but it is not very likely that big steel mills will therefore switch to the spot market instead,” he said. Xu said China had yet to give its formal consent to the new quarterly pricing system, with talks still continuing and current supplies imported on a “case-by-case” basis.
The whole industry is now in a “transitional phase” and even the three miners — which command about three quarters of the global seaborne iron ore market — were likely to be considering whether the quarterly mechanism was the best option, he said.
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