COLUMN-Iron ore can’t go back to the future to annual pricing – by Clyde Russell (Reuters U.S. – February 23, 2015)

LAUNCESTON, Australia, Feb 23 (Reuters) – Iron ore should go back to the future and reinstate annual contract pricing, according a former executive of top miner Rio Tinto. He’s wrong.

Mal Randall, who spent more than 25 years at Rio Tinto and also helped set up an Australian iron ore miner, said the move to iron ore spot pricing from 2010 onwards was a disaster, the Australian Financial Review reported on Monday.

Up to a few years ago, iron ore had been priced through annual talks between steelmakers and their largely Australian suppliers. This changed, largely at the behest of former BHP Billiton chief executive Marius Kloppers, who wanted to take advantage of a shortage of supply to generate higher returns for his iron ore mines.

“It was orchestrated and brought in by a guy that has no responsibility now, Kloppers who used to run BHP,” the newspaper quoted Randall as saying. “It’s great to make these changes and then he’s gone.”

Randall, who now chairs mineral sands company MZI Resources, is correct insofar as the spot market pricing is no longer working in the favour of the big miners.

BHP Billiton, Rio Tinto and Brazil’s Vale reaped the benefit of the switch in the initial period as Chinese demand for iron ore exceeded available supply, driving spot prices to record highs.

Asia spot iron ore .IO62-CNI=SI reached $191.90 a tonne in February 2011, but has since plunged 67 percent to $63.40 on Feb. 18, the most recent day of trade before the lunar new year holidays.

But the reason behind the sharp decline isn’t the move to spot pricing, or even market manipulation by traders, as alleged by Randall in the article.

It’s simply that the major iron ore miners have brought too much to market at the same time that China’s steel demand appears to be peaking.


The big three miners, along with number four Fortescue Metals Group, are in the process of adding some 400 million tonnes a year of iron ore capacity.

This will be further boosted by the 55-million-tonne-a-year Roy Hill mine in Western Australia state, which is due to start operations later this year, and Anglo American’s Minas Rio project in Brazil, which has a capacity of about 26 million tonnes.

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