The 2010 annual iron ore benchmark price negotiations between the big three miners and China is heading for a repeat of last year's collapse as the world's biggest iron ore miner, Vale SA of Brazil, has walked out of the 2010 talks with China after the Chinese steel mills rejected its 90-per cent increase, according to Chinese media reports.
As Chinese steel mills rejected Vale's proposal outright, Anglo Australian miners, BHP Billiton and Rio Tinto have also walked away from the talks.
Not only is Vale seeking a 90-per cent increase in the 2010 contract prices, but the miner, which produces nearly 15 per cent of the global iron ore output, also wanted to scrap the annual contract in favour of quarterly contracts.
In 2008, Tinto in raising contract prices by 97 per cent enabling BHP and other mineroing giants to follow.
Taking the lead in the negotiations from last year's lead negotiator Rio Tinto, Vale had proposed a 90-per cent increase in lower quality ore fines and a 100-per cent increase in higher quality ore lumps and pellets.
In February, Vale had called BHP Billiton and Rio Tinto to join it in dumping the 40-year old system of annual contract pricing in favour of spot prices, also mooted by BHP Billiton in the last two years.
The aggressive posture suddenly adopted by Vale has caught the global steel industry by surprise since the Brazilian miner had always favoured the benchmark system.
Tom Albanese, chief executive officer of the debt-ridden Rio Tinto, taking the cue from Vale, told a mining conference in Florida this month that the four-decade- old tradition of negotiating prices for annual contracts needed to change before it disintegrates.
Interestingly, BHP Billiton's chief executive Marius Klopper, who had been clamouring to do away with the benchmark system, had said last month that it was high time that long-term contract pricing system was dumped.
Early this month, Chinese steel makers had decided to agree to a 50-per cent increase in the price of contract iron ore, according to reports in official Chinese media. (See: Iron ore prices set for massive hike)
An estimate issued 1 March by Nomura Holdings Inc said iron ore contract prices were likely to rise 70 per cent in 2010 as ore producers try to bring spot prices closer to market rates.
This is an upward revision of a Nomura's previous prediction of an increases of 40-50 per cent for iron-ore prices in 2010.
The fact that spot market prices of ore delivered to China, the world's largest buyer, rose to their highest levels in more than a year on Tuesday lends credence to predictions of a hefty rise in contract ore prices for 2010.
The spot price of iron ore delivered to China, the world's biggest buyer, rose 1.1 per cent to $134.50 a dry metric ton on 2 March, according to The Steel Index. The spot price, which includes freight and insurance, is about 107 per cent higher than the contract price for Australian ore.
Incidentally, the big three miners have already commenced long -term benchmark price negotiations with Japanese and Korean steelmakers, which risks being trashed if miners do move ahead with the change in the pricing system.
China, the world's biggest producer and consumer of steel, imported a record 325 million tons of iron ore last year, of which, 60 per cent came from Australia and Brazil, while India, the third largest supplier to China, supplied 23 per cent. The remaining 17 per cent was met by South Africa and other countries.
Last year, China did not conclude the benchmark price for iron ore with the big three miners, since it was seeking a 40-per cent cut in iron ore prices, while the miners were not willing to give in to more than 30 per cent.
The three miners then negotiated the benchmark price for iron ore with Japanese and Korean steelmakers. The price fixed last year was $60 a tonne, while the spot prices had icked up $100 - $130 a tonne since November, after having plunged below the benchmark rates. They are currently hovering around $130 a tonne.