Global iron ore trade, which is dominated by companies like BHP and Rio Tinto and Vale of Brazil, is poised to see radical new price trends in 2009, thanks to production cuts and volatile market conditions in the last few months.
Indian ore prices are likely to follow a similar trend which includes an unprecedented price correction in annual 2009 contracts after a 97% jump in 2008 topping rise in six consecutive years, flexible buyer-seller contracts replacing fixed annual settlements and the option to re-adjust prices against spot rates in future. Anuual iron ore contracts spread between April-March witnessed a 72% increment in prices in 2005, 19% for 2006 and 10% for 2007.
"The new price trends will provide both buyer and seller respite in an otherwise turbulent market which has seen wild swings in last few months," said Hemankur Upadhyaya, head of research at Earthstone Group, a Jakarta-based mines and mineral group with interests in Indonesia, Niger and India. "Overall production cuts are likely to range between 10-15% this year," he added.
"Launch of exchange cleared iron ore swaps by Singapore Exchange (SGX) on April 27 is an interesting step ahead towards a more flexible market related pricing mechanism. It will also help in controlling volatility in spot prices," Upadhyaya added.
The move will help the industry to reduce its dependence on traditional model of using contracts with big three iron ore miners as benchmark negotiation prices. "Also, it would be more useful for junior miners as more information on contracts become available in a transparent fashion," according to Earthstone’s report on Iron Ore Industry Outlook for 2009 due to be released next week. Indian miners sell substantial quantitites in the spot market with exports accounting for 50% of production.
The three largest iron ore producers control two-thirds of seaborne trade. But another positive development towards flexibility of pricing mechanism is the recent move by Vale to offer a 20% discount on 2008 contract prices now, and agreement to adjust the future prices based on spot prices in future.
The annual price contracts for iron ore are generally spread between April to March. But, given the sharp fall in prices, steel producers in China have started negotiations in January 2009, to surrender three months of high priced contracts. Chinese steel producers opened the latest round of negotiations with a demand for 40% to 50% price cuts, while iron ore producers are delaying price negotiations since they expect the demand to recover in later half of the year.
Source: Economic Times
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