Miners cash in on iron ore boom

published 12 March 2010

"It's time to make hay once again for the global miners," says Garry White in The Daily Telegraph. For 40 years, the biggest mining companies have set annual benchmark prices for iron ore with key customers such as China only about a third of iron ore is ever available in the spot market. As they attempt to finalise negotiations for 2010-2011, the three top iron-ore providers, Rio Tinto, BHP Billiton and Brazil's Vale, are in a strong position.

The spot price has more than doubled to over $130 per tonne as the global economy has recovered. China continues to add steel capacity and "even the steel market in Europe has picked up", say Patrick Flockhart of Steel Business Briefing. Last year the miners set a price of $60 per ton with Japan; now there is talk of a 60%-80% hike in benchmark prices quite a boost, given that iron ore comprises half of Rio's operating profits.

The miners are now increasingly pushing for quarterly contracts based on the spot price after steel-makers failed to meet their annual purchasing commitments early last year, says Javier Blas in the FT. China, for instance, simply headed for the much cheaper spot market after prices collapsed. Quarterly contracts "will become the norm", says Jim Lennon of Macquarie. Short-term contracts, however, amplify the downside for producers if the global economy and steel market take a renewed tumble.