According to Mr Shan Shanghua secretary general of the China Iron and Steel Association, replacing the yearly iron ore pricing system with the quarterly pricing system has been a reasonable choice, but the current pricing system or the price indices are unreasonable and should be reformed.
CISA suggested that iron ore price indices should be based on the steel price indices.
Mr Shan said at an international forum on raw materials used by China steel industry that the price indices for the quarterly pricing system are not reasonable. The views of iron ore buyers and suppliers on this matter differ considerably.
He said that the performance of the quarterly pricing system over the past half year shows that it has not addressed the issue and there will be speculation when the spot prices are higher than the quarterly prices while there will be contract violations when the spot prices are lower than the quarterly prices.
Mr Shan said using the spot prices for a small portion of iron ore imports to determine the global iron ore prices is not representative and is a type of bias of the big three miners against steel mills.
He said that furthermore, the current index mechanism for the quarterly pricing system imposed by miners upon steel enterprises has resulted in disorder in the global iron ore market increased the difficulties of iron ore suppliers and buyers in executing production plans and forming long-term strategies brought about plenty of uncertainties and unpredictability to the steel and related downstream industries. The tough practice of the miners will not be sustainable.
Mr Shan said after careful analysis, CISA believes the price of iron ore should be connected to the price of steel. Iron ore is not a final good and its commercial value could only be embodied in the
1. First-Time Steel Products, The First-Time Steel Products include steel sheets and steel bars and the iron ore only accounts for 30% of their cost. Therefore, the price of iron ore should be connected with the price of steel.
2. The "First-Time Steel Product" Index is a much more extensive concept than the iron ore index, and there are over 10 organizations publishing the "First-Time Steel Product" Index in China alone.
This is the first time that CISA, the coordinating body for Chinese mills in iron ore price negations with foreign miners and accepts quarterly pricing mechanism.
Starting in 2010, the global big three iron ore miners have dropped the traditional yearly long contract pricing system and initiated the quarterly pricing system with the excuse that steel mills violated contracts during the international financial crisis.
The price indices for the quarterly pricing system imposed by iron ore miners on Chinese steel enterprises are based on the average cost, insurance and freight prices on China spot market in the previous quarter. However, spot iron ore imports account for about 20% of China total iron ore imports.
(Sourced from People Daily Online)
