Iron-ore pricing is heading towards greater transparency, BHP Billiton CEO Marius Kloppers said last week. Kloppers told journalists in Johannesburg that steel-pricing dynamics had changed towards shorter contracts.

In the seventies, many products, including oil, copper, aluminium and nickel, were sold on a benchmark-pricing basis.

But, over time, the processing step downstream, for example oil
refining and steelmaking, tended 
to become a cost-plus business in
which the raw materials as well as the conversion margin basically set
the price.

He told Mining Weekly that steel had traditionally been sold on annual
contracts to, for 
example, car companies, which were locked in for a
year at a time.

Particularly with the rapid growth of the steel market in China, the
steel-pricing dynamics 
had, however, changed towards shorter-term
contracts.

This change had come about because steel producers who were locked into
raw material prices for a year at a time, during periods of price
volatility – as experienced in the last 18 months – were placed 
at a
distinct disadvantage to 
rivals.

“We think that it is actually the steel market evolution that is going
to drive the way in which the steel raw materials are priced, because,
basically, people want to hedge themselves internally.

“We have been very vocal, saying that this is a good thing, 
because we
like pricing systems that are transparent, where the market discovers
the price and where the customer and the supplier do not have to waste
energy, and often goodwill, in 
establishing that price.

“That’s certainly the case for most of our products and we think that’s
the way that the iron-ore business is heading,” Kloppers said.

Coking coal – another steel-feed material – that BHP Billiton had been
selling in China was already on a spot basis or at prices determined
quarterly.

The price volatility was not a major issue, particularly for BHP
Billiton with its diversified portfolio because, if the iron-ore price
fell, the coking coal price or the petroleum price might rise.

“We’re not particularly concerned that the prices would move around a little more,” Kloppers said.

Source: Mining Weekly

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