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Tentative Deal Reached on New Iron Ore Price System

Global miners and Japanese steelmakers have reached a tentative deal to replace the 40-year-old iron ore pricing system based on annual contracts and lengthy negotiations with short-term contracts linked to the spot market.

Open cast mining for iron ore.
Tim Graham | The Image Bank | Getty Images
Open cast mining for iron ore.

One senior executive involved in the talks said: “There is an understanding on both sides to move to quarterly pricing. The negotiation is no longer about annual contracts.”

But the miners, including Vale of Brazil and UK-based BHP Billiton and Rio Tinto , and steelmakers such as Nippon Steel, JFE, Sumitomo Metals and Kobe, still need to resolve significant obstacles to reach a final agreement, the executive added. None of the Japanese steelmakers could be reached for comment.

The understanding is the clearest sign yet of the demise of the traditional annual system, following pressure for change by the miners.

The executive said a final deal could be announced by the end of the month. “We are talking about weeks, not months,” he said.

On the other hand, miners are still far from reaching a deal with mills in China and Europe.

The move to quarterly pricing comes after the Japanese steelmakers this month accepted a similar shift in coking coal.

Malcolm Southwood, commodities analyst at Goldman Sachs JBWere in Melbourne, said: “It seems increasingly likely quarterly pricing for iron ore will also be introduced this year.”

Under the traditional iron ore system, the first price agreed between a miner and a steelmaker became a benchmark followed by the rest of the industry for a year. Because the cost of iron ore affects steel prices and, ultimately, the cost of everyday goods, the benchmark talks had been one of the most important commodity price negotiations.

European and Chinese steel executives are keen to maintain the annual benchmark system, arguing it has led to stable steel prices, enabling them to offer customers, such as automakers, annual steel contracts. They say quarterly iron ore prices would lead to volatile steel prices.

The steelmakers would face higher costs if they move to quarterly prices linked to the spot market. Current spot prices of $143.80 a tonne are, when adjusted for the cost of freight, more than double the $60 level at which the annual iron ore contracts were settled for the 2009-10 year ending in April.