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April 2, 2010 11:06 am
Posco, the world’s fourth-largest steelmaker, on Friday became the latest in the industry to agree to buying iron ore based on quarterly contracts, as miners this week convinced their largest customers in China and Japan to drop a 40-year-old annual pricing mechanism in favour of shorter-term deals based on the spot market.
The provisional agreement between Posco and Brazil’s Vale will see the South Korean company paying $100-$105 a tonne for iron ore from April to June – up to 86 per cent more than what it paid in the past year.
A person close to the talks on Friday said Posco preferred the annual contracts because they offered more price stability. “But miners have the pricing power of an oligopoly. The balance of power has shifted in the miners’ favour as demand for iron ore keeps increasing with the rapid development of the Chinese steel industry amid tight supply.” A company spokesman said talks to finalise the deal continued.
The global industry body representing steelmakers on Thursday issued a statement calling for competition authorities around the world to examine the iron ore market for possible signs of the largest miners abusing their market dominance.
The World Steel Association said that the existing benchmarking system, based on annual contracts, supported long-term relationships between the steel industry and raw materials suppliers and led to beneficial medium-term investment decisions. “The implied move to spot pricing will be volatile and benefit neither side in the medium to long term,” said Ian Christmas, director general.
“The ability of the mining companies to impose this change which maximises their short-run profits, comes from the uncompetitive market for sea-borne iron ore,” he added. Vale, Rio Tinto and BHP Billiton controlled 68.5 per cent of the sea-borne iron ore market, the association said.
Global steel prices are set to leap by up to a third following the introduction of the new price system that will see the cost of the resource nearly double.
“Once we receive higher-priced raw materials, it will be a factor for driving up steel prices. But we will make a price decision based on market conditions,” said the Posco spokesman.
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