Despite rumors of agreements on "provisional prices," none of the big three iron ore suppliers – BHP Billiton (BLT.LSE, BHP.ASX), Rio Tinto (RIO.LSE, RIO.ASX) and Vale (VALE.NYSE)– has entered into interim iron ore price agreements with Chinese steel mills, according to state media.
This is not surprising; Chinese producers had previously agreed to work together during price negotiations this year – led by Baosteel (600019.SH) – to avoid a repeat of last year’s failure. They have been seeking to limit price increases, arguing in part that China’s role as a major iron ore consumer should entitle it to discounts.
It’s unclear, however, whether China’s steel mills are likely to be any more successful in securing a deal by sticking together. At the root of the problem is the benchmark iron ore pricing system established at a time of negligible demand from China. As former BHP China President Clinton Dines argues in the February issue of China Economic Review, that system is "effectively dead" and now only succeeds in encouraging the development of China’s highest-cost suppliers.
China’s mills have shown more determination to secure contracts this year, but in a seller’s market they are unlikely to get the deal that they want. Securing lower contract prices would be advantageous, but a failure to do so, while hurting profitability, would not be catastrophic: China’s mills do not rely solely on contract ore – according to Vale’s own estimates, 70% of China’s iron ore trade in 2009 was on the spot market.