Reuters reported that with plummeting world demand for steel, more mills may opt to link future iron ore supply contracts to over the counter market prices rather than traditional term contracts.
The report quoted Mr Raymond Key director of metals trading Deutsche Bank as saying that he was encouraged by the increasing interest from higher production cost steelmakers, especially in China in linking supply contracts to an iron ore index price.
Mr Key further said that "2009 will be a critical point. It won"t happen all at once but we could see 10% to 30% of the term contracts linked to indexes. 10% would be a massive signal."
Spot iron ore prices are currently quoted below term ore prices and could decline further if the world demand for steel does not recover soon. Vale will begin negotiations with the world"s major steel mills in the coming weeks to set term prices for the next season that starts on April 1st 2008 with the Japanese business year.
It may be pointed out that currently, Brazil"s Vale negotiates face to face with its big clients, the world"s largest steel companies to set annual iron ore prices in what is referred to as the benchmark system. The first major steel company to agree tends to set a precedent which other miners and steel companies follow. Vale and major steelmakers are reluctant to abandon term ore price negotiations in favor of setting prices via an ore index market that lacks liquidity and could expose prices to the whim of speculators. The lack of a sophisticated futures market, however, also limits miners" and steelmakers" access to modern hedging instruments like those relied upon by major companies that utilize commodities traded on futures exchanges.