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Just as Australian mining giant BHP Billiton and Brazilian miner Vale had announced their seasonal prices to customers, Australia's 2nd largest mineral supplier Rio Tinto said Friday that they are currently negotiating seasonal prices for iron ore.
Now the 3 minerals giants have formed a consensual strategic business plan in shortening from long-term agreements to short-term contracts in international iron ore prices.
BHP Billiton has been pushing for short-term prices for years, but this time it has received positive responses, the Big Q is Why now?
First: there are huge changes in supplies and demands. By the end of Y 2003, China's Baosteel participated in the negotiation of the international iron ore prices for Y 2004 for the 1st time attracting much public opinion and attention. China strictly followed the rules of the international pricing negotiations, but China's entrance into the market affected the climate of the talks.
Compounding with the high-speed growth of the steel industries and the increasing domestic demands of iron ore, China's weight in the international iron ore market has escalated. A survey has said that demands driving by China has climbed from 16% to 70% in a 10 yr. period.
Second: the financial crisis. The 3 global iron ore giants have experienced a fluctuating period of financial crisis which hurt them too. During the financial crisis, some steel companies refused to continue implementing contracts, which resulted in heavy losses to mining companies. But now that the economic recovery has begun in earnest, demands are rising again. So, from suppliers' POV, abolishing the traditional long-term agreements but using short-term contracts is more cost-effective + the Big 3 miners' profit can be doubled.
Third: there is also much speculation behind international iron ore pricing. The industry, once virtually ignored has now become one of the most popular. Big change augurs Big Opportunity. Thus, the huge potential of Iron Ore, which now begins to look like Gold and Crude Oil given the strategic value of iron ore, many analyst forecast that the speculation in it will be strong.
Fourth: BHP Billiton has been behind international iron ore negotiation and been a driving force for the change for a long time. BHP+B, is the # 1 giant in the core industry of Australia, has a great team of think tanks and advisers. Further, it enjoys the support of the Australian government, and its strategic plan released in Y 2000 included the China Factor and included a set of strategic policies to match China's inclusion.
It is interesting to note that Australia avoided meltdown in the recent economic crisis due in big part to its business and trade relationship with China.