Global miners and steelmakers may replace the existing annual negotiations with a new quarterly-based iron ore pricing system, Wall Street Journal reported on Monday, which is expected to increase the volatility of steel prices and make the system more transparent.
The new system is likely to be tested by end of the year, according to miners and steelmakers involved in crafting the deal, Wall Street Journal reported, without revealing the source of the information as negotiations are secret.
The move comes at a time of tension between miners and the biggest iron-ore customer, China.
China's steel industry is planning to revamp the iron ore import business after the detention of four employees of mining firm Rio Tinto for spying.
Theoretically, steelmakers would pass on any lower prices to their buyers and raise them in the reverse. They also might be likely to rely more on market supply and demand, and less on secretive criteria, as currently is the case.
It is good news for both miners and steelmakers if the new system is adopted, said Zheng Ge, steel analyst, Wangda Futures Co Ltd.
According to Zheng, the China Iron and Steel Association (CISA) may accept the 33% cut in iron ore prices offered by Rio Tinto and BHP Billiton due to the huge demand for iron ore in China.
In that case, China's steel industry may see profit margins decline. Zheng said. However, if the contract price is quarterly based, then in the short term, the cost of steel might go up and that in turn would push up prices due to the strong demand from property and railway sectors, he added.
Since the global economy slowed late last year, steelmakers, particularly in China, have been pressuring for lower prices. CISA rejected a 33% cut which is accepted Japanese and South Korean mills with Rio in May, and pushed for a 40% cut.
However, there were reports that some Chinese steel mills had already agreed to the 33% cut.
Cui Jingyi, a steel analyst from Guitai Junan Securities said the big Australian miners may press for the new system, while Brazil's Vale SA may opt for annual pricing, as the spot price of Brazilian ore is more expensive than Australian ore.
The shipment charges for Brazilian ore is higher due to the long distance despite its free on board prices being cheaper than Australian ores, Zheng said.
Spot prices for iron ore delivered to China jumped to over $90 a ton for the first time this year due to the climbing shipments.
Iron ore for immediate delivery advanced 4.6% to $91 a ton last week, the highest since October last year, according to Metal Bulletin prices.
The country is boosting shipments on the cash market because of the breakdown in talks for a benchmark price between steelmakers and foreign producers, according to Bloomberg.
Ian Ashby, chief of the iron-ore division at Australia-based BHP Billiton, the world's largest miner, says lower-cost producers of iron ore, such as his company, function better in a quarterly system.
The spot market is where buyers and sellers meet to find the true market price for iron ore, said Mr. Ashby, quoted in a transcript from a bank-investors meeting in Australia in May. From my perspective it should be clear to everyone that the changed market dynamics, created by China's voracious appetite for iron ore over the past five years or so, makes obsolete a system whereby pricing is locked in for 12 months, based on little or no transparency.
The price system change is not something new, rather the Rio Tinto scandal might push for the setting up of a new pricing system, said Cui.
Australia's foreign minister, Stephen Smith, said Chinese officials told him the detention stems from a criminal investigation into iron-ore price negotiations, not into espionage, Wall Street journal reported.
Mr. Smith's recounting Sunday of comments made by Chinese officials appeared at odds with previous statements by Beijing on the case of Stern Hu, an Australian citizen, and three Chinese colleagues at Rio Tinto. China detained the four on July 5, and has alleged the employees used bribery to obtain state secrets and damaged China's economic security.
Those early statements suggested the case was being treated as something beyond a criminal investigation. It wasn't clear from Mr. Smith's remarks whether China is changing its position.
Rio on Friday issued its strongest denial so far in the case. Sam Walsh, the company's chief executive of iron ore, said in a statement that allegations that its employees were involved in bribery are wholly without foundation. The company believes the employees acted at all times with integrity and in accordance with Rio Tinto's strict and publicly stated code of ethical behavior, the statement said.
However, as China's largest steelmakers are state-owned enterprises, the information about them could be considered a state secret, as state secrets refer to classified information including national economic developments according to the current state secret law.
Mr. Smith on Tuesday said he hoped to meet China's Foreign Minister Yang Jiechi at this week's Association of Southeast Asian Nations Regional Forum in Thailand in what would be the highest-level meeting yet on the case.
If my Chinese counterpart is there, I hope to have the opportunity to speak to him about Stern Hu, Smith told Australian state radio.
We very strongly believe that the best way of seeking to protect and defend Mr Hu's interests is by a calm, methodical, assured approach, Smith said. If and when Stern Hu is charged ... we'll be there.