Chinese mills look to widen iron ore pricing options
Qingdao, 27 September (Argus) — Chinese steel mills are pushing to use a basket of indexes to price their long-term iron ore purchase contracts with the major Australian and Brazilian producers.
Chinese buyers are considering selecting a few indexes that have market influence to price their deals. Indexes under consideration include those provided by price-reporting agencies (PRAs) such as Platts, Argus and Metal Bulletin, as well as Mysteel and other Chinese companies, Ji Chao, group executive at China's largest steel producer Baowu, said at the China iron and steel association (Cisa) conference in Qingdao.
The iron ore term contract price has been tied to indexes published by PRAs since the end of the annual benchmark system in April 2010.
It is time for steel mills to move away from pricing close to 1bn t/yr of iron ore based on a single index, Cisa vice-president Wang Liqun said.
"In the past two years, many relevant parties have raised doubts on both the ability of this (reference) index to reflect the market value, and the justice of being forced to use it," he said.
Cisa has held talks with industry participants since June on pricing iron ore using a basket of indexes, with Wang expecting "substantial progress" by the end of this year. Chinese mills and traders should share more transaction information with PRAs to make indexes responsive to market changes, while conducting their own research into each PRA's methodology and mode of price calculation, he said.
Iron ore price indexes have a strong influence on mills' procurement costs and hence profitability. The profit margin on sales by steel mills is still quite low compared with the margins enjoyed by iron ore producers, Wang said.
UK-Australian firm Rio Tinto will continue to sell fixed-price cargoes in the spot seaborne market to support price discovery, the company's vice-president of sales Simon Farry said. Most spot sales are currently done on a floating basis, which does not contribute to price discovery, he added.
Rio Tinto is the world's second-largest iron ore producer behind Brazil's Vale.
Baowu, formed last year by the merger of China's central government-owned Baosteel and Wuhan Steel, is the country's largest steel producer.