Vale, Rio Tinto, BHP seek to dump contract pricing

Brazil's Vale, the biggest iron ore producer, has called on Anglo Australian rivals BHP Billiton and Rio Tinto to join it in dumping the 40-year old system of annual contract pricing in favour of spot prices, also mooted by BHP Billiton in the last two years.

Jose Carlos Martin, executive director, ferrous minerals, at the Rio de Janeiro-based Vale said this week that the huge difference in benchmark price and spot prices last year calls for a review of the decades-old benchmark system.

Last year the three miners had negotiated iron ore prices with Japanese and Korean steelmakers under the benchmark system at $60 a tonne, while the spot prices had been picked up $100 - $130 a tonne since November, after having plunged below the benchmark rates. They are currently hovering around $117 a tonne.

According to Martin , 50 per cent of the global seaborne iron ore trade is under spot market prices, with China buying nearly 70 per cent of its iron ore from the spot market.
Since the spot market price is a reality, unlike benchmark prices that are subject to negotiations, he wants iron ore consumers to accept this pricin system.

The aggressive posture suddenly adopted by Vale has caught the global steel industry by surprise since the Brazilian miner had always favoured the benchmark system. Interestingly, BHP Billiton's chief executive Marius Klopper had said early this week that it was high time that long-term contract pricing system was dumped.

Tom Albanese, the chief executive of debt-ridden Rio Tinto, which survived last year due to record sales of iron ore, also says that the current benchmark system needs to be changed.