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Iron ore price negotiations - Miners to resist leaving spot prices
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Monday, 15 Nov 2010

The Australian reported that European steel industry body EUROFER has flagged a return to the old iron ore benchmark system. This is a move the major miners will resist because they enjoy the benefits of pricing mechanisms linked to the spot price.

The world's largest miner, BHP Billiton led the charge earlier this year to move its iron ore customers away from the 40 year old annual system and on to quarterly pricing mechanisms, more closely linked to the spot price.

Mr Gordon Moffat DG of EUROFER said that “I think it may return to annual contracts but it will take a shift by one of the majors. It may wait until the market is less tight. There are already mid level iron ore producers that prefer it."

UBS analysts said that the iron ore market was facing a wall of new supply meaning record prices could halve over 5 years. The consensus on iron ore was unequivocally bearish. Analysts are anticipating a wall of new supply and their price forecasts reflect that.

The report outlined that the general consensus is for 25% fall in prices to USD 120 per tonne next year from the current spot price of about USD 153 per tonne. The general forecast is also for the long term price to more than halve to USD 60 per tonne by 2015.

But Mr Garran has questioned the ramp up of iron ore supply by the major miners which could affect prices if it does not come on stream as predicted. The world's largest producers Brazil's Vale, BHP and Rio Tinto have potential expansion plans totaling 265 million tonnes by 2015 which Mr Garran said should on paper move the market into significant surplus.

He said that what we question is when if ever and at what cost this material comes to the market. Given the multi billion dollar investment required to bring on new capacity, in our view producers are inclined to keep the market tighter for longer, as opposed to bringing on new capacity. The next question to ask is whether there is a risk that the wall of supply scheduled for 2013 to 2014 is subject to delay.

Despite any changes to the supply and demand equation which will move the spot price and affect the new pricing mechanisms adopted by the iron ore producers, the market does not expect a return to the old benchmark system.

Mr Peter Arden analyst of Ord Minnett said that it was highly unlikely the majors would re adopt a system they worked hard to move away from. There was too much uncertainty about the old system to make it appealing to return to. The movement in the price mechanisms provided more transparency and recognized spot related prices.

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