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BHP Billiton’s ceo Marius Kloppers always said that moving to an iron ore pricing system reliant on a third-party reference to fix contracts would draw the poison from relations between iron ore producers and buyers.
Perhaps this year’s China Iron & Steel Assn (Cisa) conference was good evidence for that: two quarters into the new pricing system, at least miners and Chinese steel mills were able to sit down in public in the same room. The event, held in the northern port and resort of Dalian, was the least controversial in years.
The conference used to herald the start of the mating season between miners and steel mills to fix annual prices, and was held in recent times against the background of turmoil and acrimony in the industry.
In 2008, Cisa told the iron ore majors not to bother coming. It was a snub that set the tone for tortuous talks, which by the time of next year’s event had only just ended, in a kind of messy default.
And by that time, Stern Hu was awaiting trial in jail, while the future of the benchmark system was being challenged by miners seeking a shorter-term – and less confrontational – pricing regime. But this year, now that even Cisa accepts annual pricing is dead, an air of civility returned. Vale, Rio Tinto, and BHP Billiton were back as sponsors, lunch hosts, keynote speakers.
One Rio delegate said the large number of colleagues flown in from various offices was a deliberate effort to show face in China, as the company tries to rebuild its confidence and profile in China following the Stern Hu affair.
Even Shan Shanghua, Cisa’s secretary general and a redoubtable defender of annual pricing, seemed to have “mellowed a bit”, according to one delegate who has known him for a long time.
Shan’s attack on what he called “unscientific” and “unrepresentative” iron ore indices still drew headlines, as did his insistence that pricing terms could be no shorter than three months.
But his King Canute-like suggestion that iron ore prices should be fixed by reference to steel prices and not the other way around sounded like an afterthought, rather than a serious proposal or negotiating position.
Nevertheless, the new pricing system is obviously still developing and more arguments are to come. BHP’s China president Ben Williams didn’t say so openly in his presentation – it would have been rude to do so – but BHP appears ideologically committed to shorter pricing terms.
Rio Tinto’s Warwick Smith, md iron ore sales and marketing, said the company would stick to quarterly prices “this fiscal year”. Rio obviously wants to give its customers, and itself, some breathing space to see how the system works.
Steelmakers themselves are still working out how they can handle more volatile costs. Many of them will be studying the emerging iron ore derivatives market, another theme which was a little more prominent this year.
Even those who are active promoters of iron ore swaps and futures accept there is still a lot of education needed and a lot of obstacles in the way.
And the announcement by Singapore Mercantile Exchange that it plans an iron ore futures contract based on Metal Bulletin Iron Ore Index prices underlines that the iron ore derivatives market is still very much work in progress, just like the new mechanisms in the physical market.