CISA wants iron ore prices based on many indexes

Issued at 2018-05-25

The pricing mechanism for iron ore should be based on several price indexes and not be the monopoly of any of them, said China iron and steel association Cisa secretary-general Liu Zhenjiang.

There are many indexes that should be major price references, Liu said in his keynote speech at the SGX iron ore conference in Singapore today. Depending on one index is not a good practice and use of multiple indexes would be more fair and transparent, he added.

Cisa has been in negotiation with the four large global mining companies Rio Tinto, BHP, Vale and Fortescue to bring changes to the way iron ore is priced. There are three major parties in the iron ore business — steel mills, trading firms and mining companies — and the supply chain will break down unless all three are making reasonable profits, Liu said.

China has long objected to the pricing strength enjoyed by the large global mining companies, with mills largely accepting long-term contracts based on a dominant reference index. But over the past year, multiple indexes have been used to price some products such as BRBF fines, Jimblebar fines and Mac fines. Cisa’s continued advocacy of diversifying the index base for pricing iron ore may lead to a broader basket of indexes becoming the norm in pricing.

Rio Tinto sees the need to engage price reporting agencies on future iron ore pricing developments, said Rio Tinto’s vice-president of sales and marketing Simon Farry. Rio Tinto has played a key role in making iron ore markets open and liquid with PB fines trades making up around 81pc of the transactions that shaped assessment of 62pc price indexes last year. The frequency of PB fines transactions has increased so far this year, he added.

China’s iron ore demand has seen a marked shift in preference for higher grade ores, said representatives of Vale and BHP. Beijing’s resolve to reduce emissions and shed outdated steel capacity and strong downstream demand have contributed to this shift in preference, which is likely to persist in the long term.

The price differential between the high- and low-grade ores are currently wider than historical averages and the preference for high-grade ores will continue as larger, more environmentally-friendly blast furnace capacity built along the coast, south and east China replaces older capacity, said BHP vice-president for marketing minerals Vicky Binns. Non-Hebei coastal mills will account for 46pc of China’s pig iron output by 2025, up from 40pc in 2010, while new integrated mills are being added in southeast Asia. These shifts will solidify the position of high-grade seaborne ores, she said.

The capacity utilisation of Chinese mills has risen to 85pc from 70pc a few years back, she said. Around two-thirds of the gains over the past couple of years in steel mills’ productivity and profit margins are expected to be sustained in the long term, she added.

Around 85pc of China’s steel mills are currently profitable, said Vale’s marketing director for iron ore and coal Rogeiro Nogueira.

The share of high-grade ores in Chinese mills’ furnace burdens rose to 40pc in 2017 from 36pc in 2015, Nogueira said. “The differentials between low- and high-grade ores are here to stay.”