As the raw material for steel, used in buildings and infrastructure, iron ore is traditionally sold on a yearly basis, but it has been moving toward shorter contract terms and spot-pricing mechanisms due to the participation of Chinese traders who started sourcing from non-traditional exporters on an ad hoc basis.
The spot iron ore market also started gaining ground amid a volatile price environment as the Chinese had no qualms breaking term contracts when prices plunged: Paying a penalty and procuring fresh spot cargoes was cheaper than honoring the higher prices agreed to earlier.
Buoyant commodity derivatives trading on mainland China also help support the case for shorter contract terms as traders can hedge their positions easily.
The same is happening for coking coal, which is another commodity used in steel making. That market used to be priced according to fixed prices on a term basis, but today the trade is moving toward an index-linked price based on the increasingly-accepted derivatives market.
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