Iron ore miners have given steel mills in top importer China the option to buy the raw material cheaper for fourth-quarter contracts, sources at mills said on Friday, following a fall in spot rates to 11-month lows.
Quarterly contracts are usually based on the average of index-linked spot prices over a three-month period ending a month before the start of each quarter.
But Chinese mills, with margins cut by lower steel prices, are not keen on paying more than $175 a tonne for iron ore -- the fourth-quarter contract rate based on June-August average spot prices -- when the current rate is around $160.
Three sources at Chinese mills briefed on the change told Reuters that iron ore miners, such as top producer Vale SA , have offered Chinese mills the option to pay for fourth-quarter supplies based on more current rates.
Another official with one of China's largest steel mills told Reuters that his company would still buy iron ore based on index, but with the reference period changed to October through December.
Reuters reported on Thursday that Chinese mills were seeking to postpone shipments or renegotiate fourth-quarter iron ore contracts.
China is the world's biggest buyer of iron ore, the biggest money maker for Vale, Rio Tinto and BHP Billiton which together control around two- thirds of the global seaborne market.
Around 1 billion tonnes of iron ore is traded in the global seaborne market, with about 20 percent sold in the spot market and the rest via long-term contracts.
MORE FLEXIBLE
The debate over pricing options suggests that the quarterly contract pricing system, which the industry adopted last year after scrapping a 40-year-old custom of changing prices every year, may not last for long, traders said.
The industry could soon move to a monthly system to more quickly reflect swings in spot prices, they said.
Chinese mills have mostly paid lip service to longer-term pricing, citing benefits for the industry's stable development, while they have been willing to switch to spot pricing in the past.
Platts 62-percent grade index prices IODBZ00-PLT from June to August stood at an average $175.63 a tonne, down marginally from $176.96 in March-May, the basis for third-quarter pricing.
BHP Billiton, the world's No. 3 iron ore miner, said it has not had any shipment to China cancelled or renegotiated in the last few weeks.
An industry source said BHP has not made changes to its pricing periods as it already prices its ore close to the period of delivery, instead of using previous quarter's prices.
Unlike BHP, Vale and Rio Tinto still price the majority of their contracts on a quarterly basis.