JULY 29, 2014 - 4:26 PM ARTICLE 9 OF 32 Chinese buyers have been unwilling to buy lower grade iron ore unless offered a discount of between 15 per cent and 20 per cent below the benchmark price. Photo: Bloomberg Miners shift iron ore price in push back against China PETER KER Australian iron ore miners are playing with the structure and dating of contracts for the ore in a bid to lessen the impact of big discounts being forced on them by Chinese buyers. The benchmark iron ore price has been below $US100 a tonne for more than two months, and Chinese buyers have been unwilling to buy lower grade iron ore unless offered a discount of between 15 per cent and 20 per cent below the benchmark price. Those discounts are much bigger than have traditionally been offered by the likes of Fortescue Metals Group, Atlas Iron and BC Iron, forcing those miners to inject some creativity into the bargaining process. Instead of continuing to set prices in accordance with the previous month’s average iron ore price, BC Iron managing director Morgan Ball said his company had been offering buyers a choice of several reference periods against which to calculate the iron ore price. For example, ore delivered in April may actually be priced until May or June. Or instead of accepting a big discount, a miner may offer a buyer the choice of taking a smaller discount on the monthly average price of the price at another point in time. Known as “quotation periods”, Mr Ball said the variations were being used as a way to bargain with buyers who pushed for a large discount. “As the prices have started to get a bit softer, to minimise discounts we are being a bit more flexible with quotation periods,” he said. ‘’If we want to keep the discount a bit skinnier, we may give them the flexibility to choose one of two or three quotation periods, whether that is the monthly average or ten days from sailing or arriving in China. “It’s a bit of a trade off.” The tactic was evident in BC Iron’s June quarter results where the average received price of $US87 per tonne was adjusted to $US84 per tonne, after taking into account some shipments from the March quarter which were not priced until the June quarter. Both received prices were well below the $US103 per tonne that the benchmark iron ore price averaged during the three months to June 30. Atlas Iron has also been shipping iron ore that is not priced until several months later, due to quotation period adjustments. Atlas last week revealed that the vast majority of its shipments during April were priced in accordance with May and June iron ore price averages. But given the poor performance of the iron ore price during June in particular, those quotation periods resulted in Atlas receiving less money than if it had been able to sell its April cargoes at the daily market price during April. But Atlas noted in its quarterly statement that the result could easily have gone the other way. “In quarters where the price trends upwards the reverse effect will occur,” the miner said. Quotation periods have been a controversial topic in the iron ore industry over the past decade, ever since BHP Billiton successfully pushed for the abolition of a system which saw iron ore prices set annually via negotiations between steel mills and miners. The abolition saw a significant amount of iron ore sales shift to a daily market price, however most miners retain a degree of flexibility around how they price their product. About 25 per cent of Rio Tinto’s iron ore is priced in accordance with the average price during a period beginning four months previously, and ending one month previously. The other 75 per cent is either sold at the daily market price, the average price over the previous month, or the average price during the quarter in which the sale is made. The iron ore industry has been hotly debating the longevity of the price discounts that have recently been imposed on lower grade ores. Atlas and Fortescue have insisted that the bigger than usual discounts being imposed on their products are a temporary phenomenon, but BHP’s marketing boss Mike Henry has disagreed, telling Fairfax Media last week that discounts for lower grade ore were “here to stay”. When asked for his view, Mr Ball appeared to side with Atlas and Fortescue. ‘‘The sense I get is the discounts you saw in June are probably topping out now,’’ he said. ‘‘My instinct is that June discounts are at the top end of it and you will see them ease down again.’’ BC Iron has vowed to return between 30 per cent 50 per cent of its net profits after tax to shareholders in the form of dividends, and Mr Ball said he did not expect to deviate from that promise. “We will look at the whole year in totality and I’m comfortable that we will be within our guidance in our dividend announcement, but that board meeting will not be until late August when we have all the financial numbers finalised,’’ he said. BC Iron’s joint venture with Fortescue produced 5.8 million tonnes during the 2014 financial year, of which 4.3 million tonnes belongs to BC Iron. BC Iron shares last traded at $3.27.
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