In a world of commodity volatility, some might think at first blush that the recent move by Vale to move 80 percent of its iron ore to spot pricing from quarterly contracts would only add volatility to steel supply chains. In actuality, the move to spot pricing ought to create far more price risk mitigation opportunities for supply chain participants than the most recent contracting method – quarterly contracts, or the former backroom annual deals that had led to the change in process over the past few years.
How does the move to spot pricing create price risk mitigation opportunities? Now that a fully functioning iron ore swaps and futures market exists, industry participants now have transparent pricing. Transparent pricing of course allows buying organizations (including end-users) to hedge in some cases, and in others, to negotiate more effectively with steel suppliers (at least those that are supplying steel from the integrated producers). Spot pricing, in turn, allows steel producers to hedge (specifically we refer to buying forward) on individual spot-price dips locking in pricing at attractive margins.
MetalMiner will soon release its daily pricing service, MetalMiner IndX℠. Just to prove how transparent the market has become for iron ore, we compared a recent 4-month average of 58% iron ore fines from India into China, and our average February price was nearly exactly the same as Platts’ pricing service, according to this recent article. See the MetalMiner IndX℠ chart below:
Average Iron Ore Prices – 58% and 62% Fines Into China
Source: MetalMiner IndX℠
Pricing for iron ore has declined year over year and quarter over quarter, but still remains “high” from a longer-term historical perspective. Vale executives, according to Reuters, “expect demand for steel and iron ore to pick up in the second half.” The lower iron ore prices have likely come from slowing demand in China’s construction sector. Prices for rebar have slipped slightly as well, according to the MetalMiner IndX℠.
Backrooms Don’t Make For Good Price Visibility
With the advent of futures markets for key steel-making raw materials such as iron ore (scrap to follow), and perhaps eventually coking coal, steel producers ought to have greater ability to manage pricing for their customers because they can lock in pricing. This ought to trickle down throughout steel supply chains as service centers take greater advantage of the CME’s HRC contract as well. Any buying organization ought to applaud this move toward greater transparency.
Vale’s move, as the largest iron ore producer, serves as the first. We anticipate others will follow.