***MB SPECIAL REPORT: So where did they settle? One quarter on in the new era of iron ore pricing
To say that the shift away from annual benchmark pricing in iron ore has caused some confusion would be something of an understatement.
To say that the shift away from annual benchmark pricing in iron ore has caused some confusion would be an understatement.
No predominant mechanism has emerged, at least not yet.
With different pricing periods being offered, calculated using different pricing formulae, it’s easy to see why some steelmakers have struggled to understand the new systems, and why the miners have had to tread very carefully when outlining their various mechanisms.
The Big Three miners – BHP Billiton, Rio Tinto and Vale – have all shifted away from annual pricing, choosing instead to set their prices on a quarterly basis, although how they will achieve this varies from case to case.
Of these majors, Brazil’s Vale is the only one to have given a clear indication of the pricing formula it has adopted for this year’s deliveries, and it has worked the hardest to make this formula as transparent as it can.
Vale uses the average of a specific index (or a number of indices) for the the three month period directly preceding the month before the quarter in question.
For example, deliveries in the second quarter of this year were priced at the average of index prices between December 1 last year and February 28 this year.
Customers may choose which index they would like to use as the basis of their pricing formula, the company says.
Those that specified Metal Bulletin’s Iron Ore Index (MBIOI) as their preferred index paid the equivalent of $116.72 cfr Qingdao on a 62% Fe basis for deliveries during this period, according to MBIOI director Cameron Hunt.
Vale iron ore averages an Fe content much higher than this. For 65-66% Fe content material, therefore, $131-135 per tonne cfr Qingdao is a more relevant number, Hunt says.
This equates to a fob Brazil price of around $100-105 per tonne, once average freight rates for capesize vessels from Brazil to China during this period are removed.
For third quarter deliveries, Vale will use the average of customers’ preferred index between March 1 and May 31.
Based on the MBIOI numbers so far, the average price for deliveries during the period will be $154.81 per tonne cfr Qingdao on a 62% Fe basis.
For 65-66% Fe content material, the average number will be somewhere in the region of $175-179 on the same terms, or $149-153 per tonne fob Brazil.
Vale will be charging a pellet premium of around $50 per tonne.
Making equivalent calculations for Rio Tinto and BHP Billiton is a much harder task. Both companies are yet to reveal their pricing formulae and both have made little effort to make their mechanisms more transparent.
Rio has gone as far as to say that its quarterly pricing will be based on the average index figure during the preceding quarter, and market participants tell MB that BHP is using a similar mechanism. Both producers may charge a premium above this number for their material.
Second quarter deliveries, for example, were priced using the average index figure between January 1 and March 31 this year. The average of the MBIOI during this period was $129.01 per tonne cfr Qingdao on a 62% Fe basis.
This was equivalent to around $118.22 per tonne fob Australia once average Australia-China rates for Capesize vessels during the period have been subtracted.
Year-on-year this is nearly double the $60 per tonne fob Rio agreed for iron ore fines at last year’s benchmark settlement.
Over the last few days Chinese steelmakers have reported that Rio Tinto asked for $120 per tonne fob for deliveries in the second quarter. Given that Chinese buyers generally pay a premium for Australian iron ore, this is certainly possible, Hunt believes.
For the third quarter, Rio Tinto’s prices should be somewhere in the region of $130-140 per tonne fob Australia, Hunt predicts, basing his assumption on the MBIOI numbers so far in April and May and forecasting prices in June.
This could change, however, given the volatile nature of the market at the moment, he says.
The prices agreed by the smaller miners have been more confused.
Some, like Sweden’s LKAB, which agreed 2010 prices at the same level as two years ago, have stood their ground, saying they will continue to settle prices annually.
Others have not, following the lead of the Big Three.
Others are even offering monthly contracts to their customers, something that has triggered many market participants to suggest that quarterly contracts are just one step towards even more flexible pricing.
Another producer said that, while it would follow the Big Three’s example and price its ore each quarter, it wouldn’t rely on indices and would sit down at the negotiating table with its customers every three months.
With some steelmakers reporting that they will be receiving deliveries from different producers priced on an annual, quarterly and monthly basis, the only thing that seems clear is that the raw materials procurement process has become a lot more complicated.