Reuters quoted BC Iron Limited as saying that a shift to quarterly iron ore pricing favored by big producers would force smaller miners for the first time to hedge output to guard against spot market price volatility.

The threat of a shift is pitting miners seeking shorter term contracts to cash in on higher spot market prices against steel mill customers demanding guaranteed prices for 12 months.

Mr Mike Young MD of BCI said that the big producers, Vale, BHP Limited and Rio Tinto Limited have made it clear they are moving away from annual price benchmarking, which means the industry will need to adjust and hedge now to stay ahead of the curve.

Mr Alan Heap analyst of Citi commodities said that the risk for miners is that a shortfall in iron ore could turn into a glut within 2 to 3 years as massive mine projects are completed in Australia, sending prices down.

Hedging in mineral commodities markets was largely abandoned a half decade ago when an abrupt rise in metals prices following a severe down cycle drove highly leveraged producers to bankruptcy. In effect, miners were forced to buy high and sell low to satisfy counter party lenders.

Mr Young said that in a two way bet BCI has sold half its projected 5 million tonnes per year output when it starts production in December to a Chinese trading group under a mechanism tied either to an annual benchmark or a spot based index. The rest is marketed by its mining partner Fortescue Metals Limited whose past sales were based solely on the yearly benchmark.

He said that quarterly pricing opens up things that don't exist right now under the benchmark. Suddenly we can take 6 to 12 month positions to protect the price.

(Sourced from Reuters)