China's Strategy to Counter Increasing Iron Ore Prices

MetalMiner welcomes guest contributor Rahul Jalan. A Chennai-based senior research analyst in metals for Beroe, Inc., Jalan tracks the global steel supply chain and analyzes global procurement developments to help develop state-of-the-art procurement solutions for the company. Beroe specializes in providing procurement intelligence for a broad swath of industries.

Chinese steel demand is expected to grow from about 700 million metric tons currently to 1.1 billion metric tons. With the ongoing iron ore crisis in India and weak steel demand, China understands the necessity of having hands-on price changes and movements of iron ore. Moreover, Chinese steel players know that the era of negotiating contracts for iron ore has passed and now there’s a need for accurate index pricing and futures pricing mechanisms to be well placed in the market.

Iron Ore Contract Mechanism Upended

Iron ore contracts have been moving toward spot market prices since BHP Billiton shifted its yearly pricing to a quarterly pricing system during 2010. And with BHP recently announcing that all its iron ore contracts have switched from quarterly to monthly pricing, it’s almost certain that all major miners are set to follow. Atlas Iron has also indicated its interest in shortening the contract size and may soon announce a similar shift, as most of its contracts are set to expire in the next month.

Despite the ongoing speculation in the past few weeks that the global economy slowdown (including China’s) may soften steel demand and lead to a decline in iron ore prices, iron ore miners are bullish about the strong iron ore demand in China. The miners also feel that the Chinese iron ore buyers are taking a wait-and-see approach for a month or two. These major miners are set for a massive expansion that requires huge capital investments. BHP alone plans to expand from its current 240 million tons to 350 million tons in 2020, and Rio Tinto estimates the need for another 100 million tons of iron ore for the next eight years.

Basis of China Iron Ore Price Index

The China Iron and Steel Association (CISA), the China Chamber of Commerce of Metals Minerals & Chemicals Importers & Exporters, and the Metallurgical Mines’ Association of China have developed an iron ore price index named “The China Iron Ore Price Index. This is mainly to influence the international iron ore prices and control the volume of exports from India to China. The price index has two “sub”-indexes — one for domestically produced iron ore and another for the import price and will use the April 1994 price as the base for computation. The import price index is based on data collected from eight ports and the domestic iron ore price index is based on the prices of iron ore concentrates in 14 China provinces, autonomous regions and municipalities as well as in 32 mining areas.

Currently, the world trade in iron ore uses three major indexes — the Steel Index, the Metal Bulletin Iron Ore Index and Platts’ Iron Ore Index, which is international — to benchmark iron ore prices. Rio Tinto, Vale and BHP Billiton, having dropped the long-term iron ore contract pricing mechanism, have started adjusting iron ore prices quarterly or monthly, based on the price indexes. This has forced China, the world’s biggest iron ore consumer, to have its own price index.

CISA lost control over the iron ore prices after the replacement of the old system by quarterly prices based on index averages, even though they continue to import more than two-thirds of total seaborne iron ore. Moreover, CISA believes foreign miners and financial institutions manipulate the other three indexes. (Ed. note: We have seen no evidence substantiating that claim.) CISA developed its own index aiming to completely eliminate external influences and get the true beat on iron ore prices and volume of imports.

The key challenge for CISA would be to get international acceptance for the China Iron Ore Prices Index over those already well placed in the market. The major miners may not accept the adjustments based on the new price index in the near future, but are certainly wary right now of Chinese modernization and of this price index being a reference for Chinese iron ore buyers.

–Rahul Jalan

Editor’s Note: MetalMiner will soon be publishing local Chinese iron ore prices via its MetalMiner IndX.


  • Very insightful research work,you have done a great job Mr. Jalan.I am eagerly waiting for your next article.

  • Good Work,
    Keep it up,done a great job.Will be looking for many more articles from you in future.

    Wish you all the best in your future endeavours.


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