***COMMENT: One small change

The end of the year is fast approaching. Steelmakers should brace themselves for more upheaval in the way their raw materials are priced. By now, they should be used to change. In 2010 the annually-agreed longterm prices traditionally prevalent in iron ore and coking coal all but disappeared. In their place are quarterly-settled, index-linked contracts. But, less than a year into their new life, these contracts as well could be set to change. BHP Billiton, the world’s largest seaborne coking coal supplier and third-largest seaborne iron ore supplier, says a number of its customers have already asked about monthly coking coal prices next year.

The end of the year is fast approaching. Steelmakers should brace themselves for more upheaval in the way their raw materials are priced.

By now, they should be used to change. In 2010 the annually-agreed longterm prices traditionally prevalent in iron ore and coking coal all but disappeared.

In their place are quarterly-settled, index-linked contracts. But, less than a year into their new life, these contracts as well could be set to change.

BHP Billiton, the world’s largest seaborne coking coal supplier and third-largest seaborne iron ore supplier, says a number of its customers have already asked about monthly coking coal prices next year.

The diversified miner would certainly support this move – BHP has for several years pursued pricing closely linked to the fundamentals of the markets in which it has interests.

And MB understands several steelmakers have already started purchasing iron ore from BHP using contracts with monthly invoices attached.

It can’t be long before the company’s coking coal contracts go the same way.

Through its alliance with Mitsubishi Development, BHP is a price-setter in physical coking coal. So other suppliers will find it hard not to follow.

For steel companies, this isn’t the best news. Three quarters into the new iron ore pricing system, leading steelmakers are only just getting to grips with how they will deal with increased volatility.

Surcharge systems have, so far, proved mills’ price risk management tool of choice. End users, unfortunately, don’t feel the same way.

They aren’t likely to swallow even more price volatility without a fight.

Some much more creative thinking will be required if monthly raw materials prices are successfully introduced.

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