The new financial year has opened without a benchmark iron ore agreement with Chinese customers for the first time in more than 40 years.
Iron ore benchmark prices were expected to be finalised with Chinese steel mills by June 30 following a three-month extension to the April 01 deadline as China pushed for a 40% price cut.
However, no deal has been reached with the China Iron and Steel Association (CISA), pushing buyers to move towards the more volatile and unstable spot market.
IBISWorld senior analyst Sam Ellis told MINING DAILY the spot market holds a range of risks and may decrease the ability of miners to make confident investment decisions.
“Unfavourable price movements [on the spot market] and the cash flow uncertainty this creates makes decision making more difficult for miners,” he said. “It may affect their certainty to create new mines which may damage the long term security of supply and upset confidence in the market.”
However, Ellis said the spot market is not without its advantages.
Spot prices are now trading at $12-$15 a tonne over benchmark prices which were recently set with Japanese and South Korean steel mills.
Chinese mills, on the other hand, have been holding out for reduced benchmark prices and purchasing large volumes of iron ore on the spot market to take advantage of lower spot prices.
Ellis predicts the pricing system will move away from the traditional benchmark system and revert to the spot market.
“Others may follow China’s lead and abandon benchmarking altogether,” he said. “Buyers may be willing to risk iron ore spot prices rising over the coming year.”
Regardless of whether a benchmark figure is reached or prices revert to the spot market, IBISWorld predicts revenue in the Australian iron ore mining industry will fall by 22.1% to $30.1 billion in 2009-10.
“2008 price negotiations were very high, reflecting very strong demand for iron ore at the time,” Ellis said. “2009-10 iron ore prices will be much lower to answer for reduced demand and lower spot prices.”