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Why can 3 mining giants consent to short-term iron ore pricing

After Australian mining giant BHP Billiton and Brazilian miner Vale had announced their seasonal prices to customers, Australia's second largest mineral supplier Rio Tinto said in a statement on Friday that their negotiation of seasonal prices of iron ore is underway.

Until now, the three minerals giants have formed a consensual strategic business plan in shortening from long-term agreements to short-term contracts in international iron ore prices. As BHP Billiton has reportedly been unofficially pushing for short-term prices for years, but why this time it received positive responses?

Firstly, there were vast changes in supplies and demands. By the end of 2003, China's Baosteel participated the negotiation of the international iron ore prices for 2004 for the first time. And the addition of China attracted much public opinion and attention since then.

China strictly followed the rules of international pricing negotiation, but China's entrance into the market obviously affected the climate of the negotiation.

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 jumped. A survey has said that demands driving by China has climbed from 16 percent to 70 percent in ten years period.

Secondly, the financial crisis is another factor. This is mainly because the three global iron ore giants have experienced a fluctuating period of financial crisis which hurts them hard.

During the financial crisis, some steel companies refused to continue implementing contracts, which has made heavy losses to mining companies. However during the economic recovery, demands surged greatly again.

Considering from suppliers' point of view, abolishing the traditional long-term agreements but using short-term contracts are more cost-effective, not mentioning recent media analysis that said if changed to short-term prices, the three big miners' profit can be doubled.

Thirdly, there are also many speculators behind international iron ore pricing mechanisms. The industries used to be one of the least favorable, but has become one of the most popular. Such a big change forms huge opportunity.

The senior executives and advisers of Australian miners do not lack people who have financial backgrounds. They should have not seen the huge potentials of iron ore, which in their eyes just like gold and oil. Therefore, given the strategic value of iron ore, it could be forecasted that the speculations of it is going to be an inertia.

Fourthly, it is BHP Billiton which has been said behind international iron ore negotiation and been a driving force for the change for a long time. As the No 1 giant in the core industry of Australia, BHP Billiton has got wonderful team of think tanks and advisers. It also enjoys the support of the Australian government. Moreover, BHP Billiton's strategic plan released in the year of 2000 has already included China factor and a set of strategic policies were established accordingly.

In this case, it would be too naive to view the change of pricing driving by Australia's mining giant to be purely commercial decision. Actually, as time passing by it has revealed BHP Billiton was the one behind Chinalco and Rio Tinto's failed marriage.

 
 
 Source : Xinhua  Editor: JAK
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