Reuters reported that Global miner BHP Billiton is in talks with a top Chinese steel mill over using index based iron ore pricing as pressure mounts on the traditional benchmark pricing system.

Miners BHP Billiton and Rio Tinto together with Brazil's Vale control around Q3 of the 800 million tonne annual seaborne iron ore trade, giving them the upper hand in setting contract prices that last for a full year starting in April. The negotiations normally begin in earnest in December and can last until the April deadline or beyond. Last year, there was no settlement until late June, and the talks seem to be just as protracted this year.

Both Rio and BHP have been known to sell to the spot market, while Vale, a strong supporter of the benchmark system, has only recently said it was prepared to adopt more flexible pricing methods for selling ore. According to BHP, the spot market is where the buyers and sellers meet to find the true market price, while Rio said the continued development of the spot market was dependant on China. BHP has lobbied for change since 2006, arguing that an index-based pricing system would allow consumers to hedge the risk of market fluctuations and lock in prices something they cannot do if prices are altered annually.

The miner thinks there are now 3 internationally recognized independent reference providers. Credit Suisse and Deutsche Bank launched in May 2008 an over-the-counter iron ore paper market, where they are offering cash-based swaps, which are settled against published indices against spot physical iron ore, delivered China. A senior executive at Credit Suisse, running the spot iron ore OTC business, said that they expected volumes to double to 15 million tonnes this year as increased volatility encouraged steelmakers to do more business on the spot market.

Japanese and South Korean steel makers have agreed a 33% price cut with Rio Tinto a deal other makers would traditionally follow under the benchmark system. But the China Iron and Steel Association, the lead negotiator has been holding out for cuts of at least 40%.


China, the world's biggest iron ore importer, also has the world's biggest spot iron ore market but spot material still only accounts for some 10% of total seaborne iron ore trade.

(Sourced from Reuters)