Iron ore suppliers mull monthly pricing plans
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Once Rio Tinto, BHP Billiton and Vale, the world's three leading iron ore giants, assume the monthly pricing plan and the index pricing plan, they will put Chinese steel mills in even more difficult situation.
The fall of iron ore's stock price and market demand have not prevented Rio Tinto, BHP Billiton and Vale – the world's iron ore monopolies – from implementing an index pricing plan.
Since the end of May, Rio Tinto and BHP have attempted to force Chinese steel mills, which prefer long-term pricing plans, to adopt a monthly pricing plan.
On March 30, Vale, which is headquartered in Brazil and is the world's largest iron ore supplier, reached an agreement on a quarterly pricing plan with Japanese steelmaker Nippon Steel Corporation, marking the end of long-term annual pricing plans.
"The quarterly pricing plan implemented this year is a transition to spot trading and index pricing," said Xu Xu, chairman of the China Chamber of Commerce of Metals Minerals & Chemicals Importers & Exporters. "Iron ore will become even more commercialized."
Chinese steelmakers already feel the chills. Reduced domestic demand and a weak international industry make the rising iron ore prices problematic for the steel industry. Some of them have already reduced production.
"Now mining companies just make unilateral decisions without informing us clients. They don't care if we will comply," said Jia Xiangrong, vice chairman of Shagang Group – the largest private steel enterprise in China.
Metal Bulletin Inc. released an earlier report stating monthly plans will first apply to small volume deals. The quarterly plans currently direct bulk deals.
Speaking about the quarterly pricing plan, José Carlos Martins, Vale's executive officer for ferrous minerals, said that the financial crisis made them realize the old long-term pricing system did not work anymore, and they decided to abandon it.
Vale started to implement its index pricing system shortly after the quarterly plan. BHP's management told China Business News, "We don't want more excessive negotiations on price. We want to focus on production."
Once the three mining companies assume monthly and index pricing plans, they will grab the money that once went to the middle trader, increasing their profit.
