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Analysis and opinion: Platts iron ore price is one-year old, and tracking oil

June 4, 2009 - It's one year since the Platts daily iron ore assessment was launched, giving the global mining and steelmaking communities a physical benchmark by which to discuss, negotiate, reference and settle physical iron ore deals.

"There has been a growing awareness of the spot market for iron ore--every steel mill globally looks at it everyday," said Jim Lennon, head of commodities research at London-based Macquarie.

"It has become an important part of the determination of the contract price and Platts has been central to our understanding of the daily change in iron ore spot prices," he added.

After a full year of data, it is striking to notice how the price of iron ore correlates with other global benchmarks--when assessed accurately to a transparent methodology, or pricing to a neutral standard.

One of the most interesting correlations is with Dated Brent, which is the Platts physical price assessment for North Sea crude oil (see chart: Platts iron ore and Dated Brent crude price: June 2, 2008 - June 2, 2009).

This is used to price about 60% of the world's physical oil term contracts.

Like iron ore today, 20 or so years ago, oil was at a crossroads in how the commodity should be priced.

It also had many long-term contracts with deep relationships between supplier and customer, who had invested in infrastructure to facilitate each other's long-term needs.

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Such oil contracts were priced annually.

After the oil shocks of the 1970s and 80s, however, it was clear that annual fixed pricing could not react to changing market circumstances and this created pricing difficulties along the oil supply chain.

Oil eventually chose to keep long-term contracts, which serve both supplier and customer well, but change the price mechanism to one that reflected a daily spot value, measured and published by Platts.

Today, between 90-95% of physically delivered oil is supplied on a long-term contract basis.

The 5% or so of spot business that occurs naturally in the market is observed and assessed by Platts and used by the oil industry to price its term business.

Next page: Freight rates fuel $4 spot price increase into China

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