Vale puts its nail in benchmark's coffin BARRY FITZGERALD February 13, 2010
VALE, the world's biggest iron ore exporter, agrees with the chief executive of BHP Billiton, Marius Kloppers, that the cumbersome and often bitter annual benchmark system for pricing iron ore is all but dead.
The policy shift by the Brazilian company strengthens expectations that Australian iron ore producers will secure massive price increases for shipments in 2010, perhaps much more than the 30-40 per cent range that the market has been pricing in to share values.
Vale said steel customers had to realise contract prices in future must reflect spot market prices.
The move by Vale away from the benchmark system is expected to infuriate China, which is already aggrieved by the pricing power exerted by Vale and the big Pilbara producers - BHP and Rio Tinto - in a tight market, as is the case now.
Under the decades-old benchmark system, the first settlement by Vale or the Pilbara companies became the price for all other deals in any given year. Now, however, more than 50 per cent of the global seaborne trade is done at spot market prices.
For years, BHP under Mr Kloppers has been pushing for more transparent and flexible pricing by reference to the spot market. Vale has been a staunch defender of the benchmark system - but all that changed on Thursday night when Vale revealed its shift in attitude, taking the global market for seaborne iron ore trade along in the process.
Vale's director for ferrous metals, Jose Carlos Martins, indicated that the change was a response to the behaviour of the Chinese steel industry - the world's biggest - during the global financial crisis, and the huge difference between contract prices set last year and the current spot price.
''The markets that were buying, especially China, decided to buy differently instead of fulfilling their contractual obligations,'' he said.
During the financial crisis, spot prices fell below the benchmark - but they are now more than double benchmark prices, at about $US130 a tonne.
"Vale will always keep its policy of selling on a benchmark basis but we believe you can't keep such a huge difference between the spot and benchmark prices," Mr Martins said. ''It causes a lot of arbitrage in the system. Everyone is trying to buy on the benchmark to sell on the spot. So it's really a mess.
"The spot market is now almost 50 per cent of the total seaborne market and in China it is nearly 70 per cent of the total iron ore market.
''So the spot price is a reality, it has to be seen as the market price today. Our customers will have to accept a different price system."
