The latest indications are that crucial changes are likely to be seen in the ongoing 2008 international iron ore price negotiations. Among the developments in question, the conclusion date of the negotiations is expected to come earlier than had generally been predicted and the ultimate price hike may be lower than previous estimations.
The new focus at the 2008 international iron ore price negotiations is on possible changes in the pricing mechanism for iron ore in the international market. The indications coming from the talks are that Baosteel and the iron ore suppliers are discussing details of a price floating system, namely, the frequency and extent of changes in the agreed basic price resulting from changes in the spot prices and ocean freight rates.
In fact, a move towards such a price floating system was seen on January 30, 2008, when Baosteel signed its new long-term iron ore contract with BHP. The contract involves a total of 94 million metric tons of iron ore over a 10-year period from April 2008 on. In this contract, the annual iron ore price is liable to be changed during each year. The deal prices will be decided with both parties' consent, rather than in line with the annually agreed prices.
Currently, once the annual price is settled, iron ore buyers and the suppliers make deals in accordance with the price within the valid term, which normally is just one year. This means that no matter how the iron ore spot price fluctuates within the one-year year, suppliers will provide the contracted quantity of iron ore to buyers at the agreed price. In recent years, iron ore suppliers have been having increasing difficulty in accepting the gap between the annual agreed price and the increasing spot prices. In this context, BHP successfully persuaded Baosteel to agree to a change in the pricing system.
This alternative changeable price mechanism has certainly had an impact on the annual price negotiations. If it is put into practice on a widespread basis, the annual iron ore price negotiations will no longer be as important as heretofore.
In this context, some well-informed experts and professionals predict that the current round of iron ore price negotiations will come to a conclusion in the near future. In addition, the final price hike margin is thought likely to be less than the predicted levels, some of which were as high as 50 percent, or even 70 percent.
The floating price mechanism is a double-edged sword. If the spot price rises as expected, the suppliers certainly will enjoy some success. Otherwise, they will have regrets. The same is true for the steelmakers. However, if the negotiations on this issue break down, it will be hard to predict when the 2008 iron ore price negotiations will reach their conclusion.