Australian iron ore miners, Rio Tinto and BHP Billiton are expected to set the benchmark iron ore price this year after Vale of Brazil, who have trditionally set the price, said it would yield to its Australian rivals.
Vale's decision will come as a surprise to the market, which had speculated it would settle the price early - and perhaps at a lower level than Australian miners had hoped - in an effort to increase sales, since its mines are operating below capacity.
Most analysts expect the benchmark price will fall by 20 to 30 per cent.
But at an annual results briefing in Rio de Janeiro on Friday, the head of Vale's ferrous division, Jose Carlos Martins, said his company had decided to change tactics this year.
"We are used to being the price-setter, but this year we have decided to wait and see what will be fixed between the Australians and Chinese, because I think China is now the main seaborne market and the Australians are the biggest suppliers [to China] and are closer, so we will tend to let them fix the price," he said.
Vale last year received price increases of 65 to 71 per cent for its iron ore, but the Australian miners held out for an 85 per cent increase, which took into account the lower cost of shipping ore from Australia to Asia.
Vale later tried to increase the price of its ore by 10 per cent, but customers rejected that move as the extent of the global financial crisis became apparent.
"Last year we [set the price] and we know what happened," Mr Martins said. "[Rio and BHP] didn't follow the benchmark. Customers accepted a higher price, and we had all of the problems that everybody knows. There is no proposal on the table from Vale. We are only waiting for what will come. If it is good, we will follow. If it is not good, we will do what [Rio and BHP] did last year."
Among the world's three largest iron ore miners, Vale has been the staunchest defender of the benchmark system. BHP is trying to replace the traditional pricing system with index-linked contracts that better reflect spot market movements, while Rio prefers a mix of benchmark, hybrid and spot sales.
Mr Martins said Vale's position as the traditional price-setter had made it a target during the negotiating season.
"Tactically speaking, many customers reduce their inventories to increase their bargaining power," he said.
Vale has been particularly hard hit by the financial crisis since its main customers are in Europe and Brazil, regions that have suffered much larger steel production cuts than China.
Vale's chief executive, Roger Agnelli, said its largest iron ore customer, ArcelorMittal, had not bought a single tonne of iron ore from the miner since October, but it was expected to accept shipments from April.
To partially compensate for lost sales in Europe and Brazil, Vale has increased shipments to China. Vale expects to ship a record 30 million tonnes to China during the present quarter, and it is doing so at the full benchmark price without reimbursing customers for shipping costs.
"We already have agreements for an additional 50 million tonnes in China per year only with new customers … who never bought from Vale," Mr Martins said.
"In the past, we never had an opportunity to test what would be our market share in China, because we never had enough iron ore to fill their needs. We have a much stronger position in China than we did before the crisis started."
Source: Brisbane Times
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