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***SPOTLIGHT: Quarterly, spot or swap — which iron ore contract to choose?

July 01, 2010 - 13:30 GMT Location: London

KEYWORDS: quarterly iron ore contracts , iron ore spot prices , iron ore swaps , iron ore , BHP Billition , Rio Tinto , Vale , Metal Bulletin

Tom Albanese’s admission that Rio Tinto may abandon quarterly iron ore pricing, should the majority of steel mills default to the spot market, could benefit the emerging market for over-the-counter iron ore swaps.

Index-linked quarterly iron ore contracts were first agreed earlier this year. Pretty much everyone agreed that this was just the first step in a move towards even more flexible pricing. But the pace of this change has been a surprise. Macquarie Research believes third quarter contract prices will be higher than spot prices as soon as July. (MB Jun 30) If this is right, steelmakers will be sorely tempted to abandon quarterly contracts very soon after their inception. On June 30 Metal Bulletin's Iron Ore Index (MBIOI) calculated at $135.5 per tonne cfr Qingdao on a 62% basis, down $2.38 on the day before. India-origin 63.5% Fe cargoes sold for $143-145 per tonne cfr main China port. Rio Tinto and BHP Billiton are expected to ask for $147...

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