The recent plunge in the price of iron ore has led to a new round of negotiations between the three major iron ore producers and large Chinese steel mills in what analysts have said is an important change to the pricing system that could make deals between the two parties more spot-price oriented.
Vale, the world's largest iron ore miner, has agreed to cut? The already-agreed price of $175 per ton for this quarter to $160 per ton, Oriental Morning Post reported over the weekend, without citing a source. If true, it would be the first time an iron ore miner has voluntarily lowered the quarterly price after already reaching an agreement. Vale declined to comment when reached by the Global Times Monday.
Xinhua News Agency reported earlier that Vale and Australian miner BHP Billiton recently agreed with three major Chinese steel companies to reform the price agreement process.
Currently, Chinese steel makers and iron ore suppliers generally agree to set prices on a quarterly basis. However, a precipitous drop in the spot price of iron ore soon after the agreements for this quarter were made has led to the steelmakers seeking to renegotiate the price, Xu Guangjian, an iron ore analyst from Umetal, told the Global Times Monday.
Iron ore experienced this year's largest drop starting September 10, when it fell from $180 per ton to $131 per ton Monday. The price agreed between steel makers and iron ore suppliers for this quarter was $175 per ton.
"Some steel companies stopped accepting new orders and want the iron ore miners to offer a new price that is more reflective of the current spot price," Xu said. "The steel makers will lose their whole year's profit if they buy at the initially-agreed price."
Liu Qiong, an analyst with Steelhome, told the Global Times Monday that the iron ore suppliers also have an incentive to renegotiate. "Some steel makers might just default on their contracts, causing iron ore mills to lose long-term customers," he said.
Xu said that a number of smaller steel makers were already agreeing prices with their iron ore suppliers on a monthly or even weekly basis before the iron ore price plunged.
"In the future, more steel makers will negotiate more flexible pricing with the three iron ore giants."
However, most big steel makers in China still make agreements on a quarterly basis, which are set a month prior to the quarter, based on the previous quarter's average index price.