As talks between BHP Billiton and Chinese steelmakers on 2008 iron ore prices passed an informal June 30th deadline, the China Iron and Steel Association (CISA) again warned it opposes the use of BHP Billiton's proposed iron ore price index system.
The association first announced its opposition last October to BHP's new strategy to move its expiring iron ore price contracts into an iron ore index with forward deliveries and financial swaps, which were considered a better indication of the iron ore spot market than the current annual benchmarking pricing system.
Nevertheless the association said Monday that it approves of the 2008 contract prices agreed to between Baosteel Group and Rio Tinto because it maintains the current pricing system. Baosteel has agreed to pay Rio Tinto nearly 80% more for its fines and 96.5% more for its lump iron ore. BHP is the only one among the top three über iron ore miners to yet reach a deal with China. Brazil's Vale announced a 65-71% price hike in February.
The CISA said--given the fact the three über miners control more than 70% of the global trade in seaborne iron ore--the use of a price index to set the benchmark goes against the principles of the current market pricing system and is not realistic. The index is improper and unfair, CIDA stated in the Chinese Securities Journal Monday. It's not good for long-term stable cooperation between the supply and demand sides, so we firmly oppose it.
CISA noted that iron ore can only be consumed by steelmakers and produced by iron ore miners. This means both sides have to live with each other and must set up a long-term and stable relationship.
Reuters reported that BHP signed supply contracts with Chinese steel mills with different expiration dates. None of the contracts between China and BHP have June 30th expiration, according to a source quoted by Reuters.
This is the first year that mining companies have not all accepted the same percentage hike in iron ore prices.
BHP has insisted that the spot market is a strong indicator of the real supply and demand balance, noting the company's participation in the globalCOAL bulk commodity index for coal. Previously, the company asserted that a good index could help buyers and sellers to have a common view of the market clearing price and could help to facilitate a faster, calmer process to agree upon an annual iron ore contract price.