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Iron ore market shifts to pricing lump on index-linked basis

By Keith Tan, Celestyn Wong and Melvin Yeo in Singapore

April 30, 2014 - Four years after a revolution that saw iron ore fines being priced off published spot price indexes, lump ore is now taking the same route and moving away from prices negotiated quarterly.

An increasing number of lump term contracts with miners like BHP Billiton, Anglo American and Mount Gibson Iron have become linked to the spot lump premium published by Platts, according to various industry sources.

Cliffs Natural Resources is also selling at least spot lump on an index-linked basis.

The shift, which market participants say started this April, came as the spot lump premium started easing from a high of $0.295/dry metric ton unit on January 20 to $0.195/dmtu at the beginning of April, according to Platts data. (See related chart: Spread between iron ore contract and spot lump widens).

Analysis continues below...

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In March, miners like BHP Billiton gave their customers in China the option of accepting a fixed-price premium for the April-to-June quarter at $0.23/dmtu, or start pricing it on an index-linked basis, off the monthly average of the Platts spot lump premium, several customers of the miner said.

Miners like Anglo American — for which more than half of the iron ore produced is lump — and Mount Gibson, have also offered to sell lump on an index-linked basis, with adjustments to account for differences in quality from the underlying specifications of the index, their customers told Platts.

Officials at BHP Billiton, Anglo American, Mount Gibson Iron and Cliffs Natural Resources declined to comment when contacted over the past month.

A number of steelmakers and traders, seeking ways of pricing lump more reflective of current market conditions, have welcomed the move, with some adding that in the second quarter at least, they expected spot premiums to be below the $0.23/dmtu offered.

"We are switching from a fixed lump premium negotiated once every quarter to one that will change every month, based on the monthly average of the Platts spot lump premium assessments," a procurement source at a major northern Chinese steelmaker said. "Our term lump premium will follow the spot index from now on."

Platts started a spot lump premium assessment weekly on Wednesdays from May 15, 2013. The assessment has underlying specifications of 62.5% Fe, 1.5% alumina and 3.5% silica, and is not origin-specific. Ores that differ in terms of quality are normalized to the stated specifications.

The price is assessed as a premium to the IODEX, expressed on a CFR Qingdao basis.

Analysis continues: Chinese steelmakers buying more iron ore than needed

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