Macquarie Group Ltd said that Vale SA and BHP Billiton Ltd the largest and third largest exporters of iron ore, are using inefficient and unsustainable pricing systems that deter investors and confuse steelmakers.

Analysts including Mr Jim Lennon and Mr Colin Hamilton in a note said that the uncertainty relates to the period of data used to set contract prices, the inclusion of freight rates and pricing for the different type of ore required by steelmakers.

Macquarie said that “From the index price, getting to a realized contract price involves a myriad of discussions. In our recent market discussions, many of the smaller iron ore players are in a situation where they are struggling to ascertain what the price of ore actually is.”

The analysts said that Vale may be willing to let customers chose between three indexes and has said it would use the average price over the months of March to May as the basis for the July to September contracts. Other companies haven’t clarified the process used.

The analysts added that “Many investors seem disenchanted by this uncertainty and are keeping away from the sector.”

They added that falling prices though may lead to a crunch point. There’s a strong chance that the spot price will be below the contract price on July 1, leading some steelmakers to default on contracts.

Vale, BHP Billiton and Rio Tinto Group account for about two thirds of globally traded iron ore market, worth USD billion a year, according to an estimate by Credit Suisse Group.

(Sourced from Bloomberg)