Global iron ore trade, which is dominated by three major iron ore producers, Australia's BHP and Rio Tinto and Brazil's Vale, is likely to be suspended to see radical new price trends in 2009, due to production cuts and unprecedented market conditions in the last few months.
On Friday, May 8, Rio Tinto said that a benchmark iron ore price for the current year below existing spot prices is unacceptable, while BHP Billiton saw the traditional benchmark pricing system breaking down.
BHP and Rio Tinto's comments came a day after Brazil's Vale, a long-supporter of the benchmark system, said that it was prepared to adopt more flexible pricing methods for selling iron ore.
Steelmakers and global miners are seemed to be locked in annual talks to settle term iron ore prices. With slumping steel demand, steelmakers want a price cut of between 40 and 60 percent, but the three miners, controlling two-thirds of the 800 million mt of annual seaborne iron ore, are resisting for a much smaller reduction.
Earlier in May, China Iron and Steel Association (CISA) general secretary Shan Shanghua, said that the Chinese steelmakers, led in the negotiations by Baosteel, should be able to get a price below the spot market, which would mean a cut of more than 30 percent.
The annual negotiations has been continuing, however miners, have come to a point to admit that the benchmark pricing system was breaking down with the emergence of iron ore over-the-counter (OTC) swap contracts, a growing spot market and index-based pricing mechanisms, which was launched by Singapore Stock Exchange (SGX) on April 27.
Meanwhile, Indian ore prices are likely to follow a similar trend which includes an unprecedented price correction in annual 2009 contracts after a 97 percent jump in 2008 topping rise in six consecutive years, flexible buyer-seller contracts replacing fixed annual settlements and the option to re-adjust prices against spot rates in future.
Hemankur Upadhyaya, head of research at Earthstone Group, a Jakarta-based mines and mineral group with interests in Indonesia, Niger and India said, "The new price trends will provide both buyer and seller respite in an otherwise turbulent market which has seen wild swings in last few months. Overall production cuts are likely to range between 10-15 percent this year."
"Launch of exchange cleared iron ore swaps by SGX is an interesting step ahead towards a more flexible market related pricing mechanism. It will also help in controlling volatility in spot prices," Mr Upadhyaya added.
"The move will help the industry to reduce its dependence on traditional model of using contracts with big three iron ore miners as benchmark negotiation prices. Also, it would be more useful for junior miners as more information on contracts become available in a transparent fashion," according to Earthstone's report on Iron Ore Industry Outlook for 2009.