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Iron ore and coking coal contract pricing: A review

By Keith Tan and Julien Hall, Singapore

September 28 - Six months after the world’s biggest iron ore and coking coal producers announced they would do away with annually negotiated contract prices, global steelmakers have had to come to grips with different ways miners want to sell their products using spot price indexes.

This feature provides a review of the various pricing systems miners have offered, based on company announcements and customer accounts.

Iron ore sees two-speed pricing

Iron ore is now being priced on two different time tracks. This is because each miner has chosen to cope with crucial operational issues like determining payment prior to delivery.

Brazil’s Vale and Anglo-Australian Rio Tinto, the two largest producers, are setting prices quarterly, based on index values lagging up to four months prior.

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For example, iron ore for delivery in October-December are determined by what the indexes publish over June to August.

The month-long gap in September serves as a buffer, as customers must usually present letters of credit before cargoes are shipped from their origins.

Such “delayed” pricing mechanisms have allowed steelmakers to have prior knowledge of iron ore prices before a quarter starts.

The delayed approach, however, presented problems for some end-users in July, when Chinese steel prices slumped, but steel mills had to cope with record-high iron ore prices in April and May.

Australia’s BHP Billiton, on the other hand, has been able to employ more “real-time” pricing for its contracts through the use of index-based provisional prices, on which L/Cs are first opened before a final price is calculated at the end of a quarter or month.

Most of BHP’s customers have shifted to a quarterly or monthly pricing system, with prices determined by index values over the quarter or month that delivery is made, customers have told Platts.

For a customer choosing to pay quarterly, for example, Q4 prices would first be determined provisionally by index values published earlier -- like the first 15 or 20 days of September -- and L/Cs would be opened based on that.

At the end of Q4, a final price would be computed, and the difference in price would be made up by either party.

Once a customer makes a choice between quarterly and monthly, and the time period on which a provisional price is based, it is obligated to stick to it.

Fortescue Metals Group’s pricing mechanism goes even further -- perhaps best described as a calibrated spot. The miner prices each shipment based on index values over the five days before a vessel’s notice of readiness (NOR) is served at the discharge port.

Like BHP Billiton, Fortescue -- also an Australian supplier -- sets a provisional price for its cargoes based on index values from an earlier period. According to customers, the average of indexes over the first five days of the month preceding the delivery is used.

For example, a cargo arriving in October will have its provisional price determined by index values over the first five days of September. When it arrives, the five-day average of index values before the NOR sets the final price.

While this pricing mechanism means nobody can predict what the price of each shipment will be until it arrives, a source at a Chinese steelmaker has said it was “fair” as long as Fortescue’s deliveries over various months are made regularly.

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