CISA suggests iron ore prices and steel prices linked

News was prepared under the information support of Online Daily Newspaper on Hellenic and international Shipping "Hellenic Shipping News".

30 Sep 2010

The China Iron & Steel Industry Association (CISA) suggested that iron ore prices should be linked to steel prices instead of iron ore indexes. Shan Shanghua, secretary general of CISA, said at an international forum on raw material that the quarterly pricing mechanism probably is appropriate when market is unstable. That was the first time that CISA, the coordinating body for Chinese steel mills in iron ore price negations with foreign miners, agreed on the quarterly pricing mechanism. Early this year, the global big three iron ore miners (Companhia Vale do Rio Doce, Broken Hill Proprietary Billiton Ltd. and Rio Tinto Group) launched the quarterly pricing mechanism to replace the yearly pricing system.
Shan said the price indices for the quarterly pricing mechanism are not reasonable, because they failed to address the problem of speculation when the spot prices are higher than the quarterly prices and contract violations when the spot prices are lower than the quarterly prices.
The price indices for the quarterly pricing system imposed by iron ore miners on Chinese steel enterprises are based on the average cost, insurance and freight (CIF) prices on China's spot market in the previous quarter. However, spot iron ore imports only account for about 20 percent of China's total iron ore imports.
In addition, the current index mechanism for the quarterly pricing system imposed by miners upon steel enterprises has brought about plenty of uncertainties and unpredictability to the steel and related downstream industries.
Therefore, CISA suggested that iron ore prices should be linked to steel prices, because iron ore is not a final product. It is the "primary material" that reflect the value of the iron ore, while the iron ore only accounts for 30 percent cost of the primary materials including steel plate, and long products.

Source: Xinhua News Agency