China pushes to ‘improve’ iron ore price mechanisms

UK-Australian mining firm Rio Tinto has said it is willing to work with the China iron and steel association (Cisa) to improve iron ore pricing mechanisms, Cisa said. The pledge came after the Chinese association urged it to further develop price mechanisms amid another bout of market volatility.

Rio Tinto's iron ore vice president of marketing Simon Farry told Cisa vice chairman Luo Tiejun that the producer is willing to work with Chinese mill buyers to review existing pricing mechanisms, according to a Cisa summary of a 15 December video conference call.

Rio Tinto did not return a request for comment.

Cisa has called for the use of multiple iron ore indexes, known as a "basket", in contracts to support "healthy" price formation. The comments from the producer came as it used a basket in an iron ore contract for the first time.

Rio Tinto recently signed a contract with a Chinese mill that indexes Hamersley Iron Yandicoogina (HIY) fines to an average of the Argus ICX 62pc index, Fastmarkets MB62 and Mysteel62, market participants said.

Rio Tinto has almost exclusively used Platts' IODEX for contract and spot business.

S&P Global Platts, Fastmarkets and Mysteel compete with Argus in providing price information.

Farry told the industry that Rio Tinto was open to new pricing mechanisms in September 2019. It made its first spot sale linked to a basket of indexes in March 2019.

"Rio Tinto's attitude to the use of baskets is still open and negotiable, but so far it has only used them for HIY, which has a very small market share" in China, a north China mill buyer said. "We would like to see wider usage of a mix of indexes after Rio changed their management. Cisa has called for the basket of indexes for three years, making it deeply rooted among market participants."

Rio Tinto appointed a new chief executive this month after its senior management was forced to step down over the destruction of a heritage site.

Fellow UK-Australian mining firm BHP was the first major producer to use a basket of indexes in 2014, indexing to an average of Argus and TSI. BHP has used a basket of IODEX and Mysteel62 for contracts and spot trades into China but will replace IODEX with the Argus ICX in its 2021 China contracts.

"I confirmed from BHP today that it will use the average price between Argus and Mysteel next year," a Tangshan mill buyer said. "In terms of the miners' views, I think they do not care about the price level as the main factor because they are already profitable from iron ore. They care more about the price index sampling size and market acceptance."

Brazilian mining firm Vale uses basket pricing in its contracts into China, and this year added the Argus 65pc index as an option. Mills have signed IOCJ contracts indexed to a basket of Argus 65pc and Fastmarkets MB65pc Fe indexes (AMB65), and AMB65 has now begun to appear in off-screen offers, participants said.

Portside markets

Cisa has pushed for greater transparency of index pricing mechanisms and trade platforms, as well as yuan-denominated trade. The latter has been a challenge because portside markets, while very liquid, are highly fragmented and have little uniformity for traded specifications. This has created problems for the Dalian Commodity Exchange's physical settlement of iron ore futures.

But portside markets continue to develop. The Corex platform expanded its portside trade options this year, and Rio Tinto, Vale and Australian mining firm Fortescue have begun limited yuan-denominated sales at the ports.

Cisa called for probes into iron ore markets in 2019 and this month in response to sharp price rallies.

A rebound in global steelmaking, record output in China, and Vale's production struggles have sent iron ore prices to nine-year highs. The Argus 62pc ICX fines index briefly rose above $175/dry metric tonne (dmt) cfr Qingdao this week, up by 92pc this year.

By Chris Newman and China staff