BEIJING (Commodity Online): China is desperate to change its iron ore pricing mechanism and trying to make amends to the present system.

In 2009, Chinese steel mills failed to reach their goals in iron ore price negotiations. As the world’s three largest iron ore miners — Brazil’s Vale SA, Australia’s Rio Tinto and BHP Billiton — all refused to accept Chinese steel producers’ demand for a 40 per cent price cut, the steel mills have no choice but to turn to the cash market.

The new accounting period, a long-term agreement based on the interaction between trade volume and price, as well as unified prices are three main factors that will make the new mechanism different.

Current accounting period of Chinese steel mills’ agreement with iron ore giants is from April 1 to March 31 of the next year. The CISA is now suggesting a new accounting period that is from January 1 to the end of the same year. United prices means that fixed prices should be determined for each kind of iron ore with different content and different quality from different regions and suppliers, and that there would be no differences between negotiated prices and spot prices. Both steel producers and iron ore traders should follow the unified prices.

Chinese steel mills didn’t expect steel producers in other countries and regions to refer to the prices proposed by China during the negotiation, and that Chinese steel mills would not blindly follow their agreements with the iron ore miners.

The three largest iron ore miners gave a lukewarm response toward the new pricing negotiation mechanism proposed by China.

FMG, which has reached an agreement with the CISA, also declined the possibility of price cuts in 2010. FMG said they were talking with Chinese steel producers over whether Chinese steel mills can enjoy discounts in the forth quarter.

These iron ore giants expect that China’s economy will continue to recover in 2010, and that China’s demand for iron ore and steel will rocket. That is an important reason why they refused to cut ore prices.

Although Chinese steel producers are investing in overseas iron mines and domestic miners are speeding up construction, the iron ore market won’t see substantive changes in the short term. Severe imbalance of supply and demand and investment barriers facing Chinese steel producers that are trying to go overseas are clear demonstrations.

Global iron ore giants have claimed to raise prices even before the negotiation starts. China now has a steel stockpile of 40 to 50 million tons, proving that there is much more supply than demand. Iron ore giants’ decision to raise ore prices lacked objective evidence.

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