Reuters quoted CLSA estimated that the inelastic system of setting iron ore prices annually has favored buyers to a large extent and caused global miners to give up two years worth of sales value over the last four years.

The report said but the market is unlikely to shift completely to a spot based pricing system, though the development of a deep spot market would allow more efficient contract pricing.

Mr Matthew Whittall and Mr Leavitt Pope CLSA analysts said "The iron ore market is already efficient. With the emergence of large volumes of seaborne iron ore being sold at spot prices into China in 2008-09, we believe the spot iron ore market will push the contract market into efficiency."

The analyst said "If iron ore producers can reduce earnings volatility by maintaining some contracts, the question then is why BHP and Rio want to end the benchmark system? As long as a sufficiently deep spot iron ore market remains, there appears relatively little advantage in pursuing 100% spot sales."

CLSA said historical evidence showed spot prices would have benefited miners more, as profits they missed out on at the peak of the cycle have been larger than the losses avoided in the down cycle, there is a lag in contract prices relative to spot prices and a lack of adequate market-clearing price discovery makes the contracts market inefficient.

Its estimate comes as the 40 year old annual pricing system suffers severe strain this year after China the world biggest iron ore buyer, passed a June 30th deadline to set annual iron ore prices.

(Sourced from Reuters)