Global iron ore case study – how to optimize today’s pricing and tomorrow’s investments

The magnitude and volatility of price differences between iron ore product types and grades is growing, causing legacy practices in contract structuring to break down

In this climate, the adoption of product-aligned pricing mechanisms is more critical than ever for iron ore miners and steel mill end-users. Iron ore market participants are best served if they can re-visit existing contracts with their suppliers and customers, allowing them to adopt trustworthy price benchmarks and value-in-use indices to facilitate trade and reach agreements more quickly.

At the same time, the positive demand outlook for high-grade iron ore has attracted investments and interest in new projects.

Business challenge: How to optimize today’s pricing and tomorrow’s investments

Against this backdrop, a large iron ore miner approached the Fastmarkets consultancy team. The customer had four key requirements:

  1. To resolve a long-standing contract dispute involving proposed price mechanism changes to its long-term off-take agreements with several partners, such that these changes could be approved by all parties amicably.
  2. To provide independent advisory services on the client’s iron ore commercial agreement and make recommendations towards making it best-in-class for its commercial teams
  3. To provide a feasibility study to a finance consortium looking to provide the client with debt finance for a significant mine expansion involving supplying high-grade iron ore concentrate products, mostly to Asian markets. Fastmarkets was tasked with evaluating the idea from a market perspective and validating the feasibility and economics of the project over a twenty-year time frame.
  4. To supply the client with a deep-dive analysis of viable strategic options, enabling them to identify future growth opportunities, organic and via acquisitions.

Our approach

Fastmarkets assigned two teams of experienced consultants to work in parallel: one team focused on the off-take agreement; one team conducted the strategic review and market feasibility study.

We applied our proprietary six-step research process, involving extensive primary research techniques supplemented by our in-house proprietary databases and forecasting models.

This enabled us to gather detailed market intelligence on customer demand and pricing information in key target markets, particularly China, over the course of the 12-week project.

Key results and outcomes:

A comprehensive pricing mechanism and due-diligence strategic assessment for a major global iron ore miner.

1. Contract setting and price mechanism consulting services

We determined that the client’s contract structure with its off-takers undervalued the superior chemistry of the client’s iron ore product relative to the base specification of the 65% Fe Fines index (MB-IRO-0009).

Our consulting team advised on the off-take contract to independently assess product grade price premiums, but also to account for impurity adjustments for silica, alumina, phosphorus, and sulphur, as well as sizing adjustments and water moisture.

We also resolved further problematic issues within the off-take agreement. This included legal clauses relating to what would happen in the event of delays in commencement of supply, slow ramp up, poor quality performance, accidents during sea voyage, delays in opening L/Cs, and buyer/trader non-performance issues.

We advised the client and its partners on the optimal structure and composition of the off-take agreement. The off-take agreement was accepted by both parties and is now in place.

Are your pricing mechanisms leaving money on the table? Contact us to find out.

2. Market and strategy advisory

The market feasibility study defined market size and potential sales volumes and revenues, which helped the bank and investment consortium in their investment and financing decisions. It covered the following:

  • Potential growth opportunities through expansion and extension of the business.
  • Long-term price forecasting of all iron ore price benchmarks and all associated VIU components (Fe 62%, Fe 65%, APP, BF pellets PP, DR pellets PP), including surcharges and discounts for quality (Fe, SiO2, Al2O3, S, P, etc.), as well as price outlooks for existing and new types of iron ore, including pellet feed of different quality in perspective sales markets on CFR (CIF, DAF, DAP, etc.) and FCA terms.
  • Upstream and downstream expansion recommendations based on market gap analysis.
  • Opportunities and benefits for integration with key customers.
  • Analysis of M&A opportunities and areas to forge fruitful long-term partnerships.
  • Key price and consumer demand trends towards higher-quality ore premiums widening over time against low- and mid-grades with full analysis of the tailwinds behind our conclusions and recommendations.
  • Analysis of Chinese customer preferences and structural shifts in sintering and pelletizing, metallurgical coal, coke and ferrous scrap market dynamics.
  • Competitor supply trends by iron ore grade and brand, environmental policy initiatives, new technology and macroeconomic drivers, among others.

About Fastmarkets consulting

The Fastmarkets consulting team can provide you with specialist research expertise and deep market knowledge, helping you to optimize pricing, reduce costs and meet long-term strategic goals.

  • Optimize trading and performance evaluation of product pricing and valuation, arbitrage opportunities, and commodity procurement.
  • Independently structure, analyse and support investment and market appraisal projects for both internal and external financial and investor-related stakeholders.
  • Create winning strategic decision support and commercial operating models based on comprehensive real-world market data and in-house expertise in supporting existing and new market/product penetration, anticipating current and future customer demands, benchmarking vs competitors and driving overall profitability growth.
  • Identify and assess the impact of value chain disruptions e.g. environmental legislation, trade policy, material substitution.
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