World Steel Association Furious Over BHP Billiton (ASE:BHP) and Rio Tinto (TSE:RIO) and Vale SA Contract Changes
Friday, April 2nd, 2010
The World Steel Association is up in arms about the changes in the way iron ore contracts by leading companies BHP Billiton (ASE:BHP) and Rio Tinto (TSE:RIO) and Vale SA, as they've changes from an annual to a quarterly time-frame.
Representing about 180 countries, the Association director general said, "Just three companies dominate this business with the major Brazilian supplier having a virtual monopoly in the Atlantic basin and the two major Australian companies having a virtual monopoly in the Pacific basin."
I think the World Steel Association completely misses it here, as the increase in iron ore prices was already going to happen, and were in the process of being upwardly increased before the changes in iron ore contracts were made.
Most analysts see this as a necessary move, as the annual pricing really didn't reflect the immediate market conditions, and in fact can hurt or harm all businesses involved, as it wasn't always to the benefit of the steel companies to have annual contracts. There will be times when the quarterly contracts will help them with pricing, and just happens that the demand for iron ore is high now; the real reason for the price increases.
There's no doubt this will result in increased volatility with iron ore prices, but that's no different than any other industry relying on products or supplies with fluctuate based on market conditions.
The real problem is the mills have been in charge in the past, and that's no longer the case with shorter contracts, so as with any change, resistance to change will always come, but it's doubtful the calls for politicians to interfere in the markets will be heeded, and prices will be based on a more accurate market metric than in the past.
Article by Gary B
The views expressed are the subjective opinion of the article's author and not of FinancialAdvisory.com
Tags: bhp billiton , commodities , rio tinto , steel , vale sa , world steel association
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