The Nikkei Business Daily (Japan) has reported BHP Billiton and Rio Tinto have notified Japanese steelmakers of their intention to raise iron ore prices during the July through September quarter (3rd Quarter) approximately 23%.

The Nikkei also reported the Japanese steelmakers are likely to settle for a price “close to the proposed figure.” It is expected VALE will most likely follow the pricing set by Rio Tinto and BHP.

According to the Japanese news outlet the new 3rd Quarter iron ore pricing would be approximately $147 per dry metric ton or 140% higher than the 2009 price.

Steel Market Update traded emails with The Steel Index (TSI) out of England which is one of the index choices miners have to peg their pricing to. Jeff Wickert of The Steel Index told SMU, “…the miners are allowing the steel mills to select their index of choice. Most are using TSI or an average of TSI and Platts and we have not heard of anyone using the MB number. The formula at this point is not cast in stone. Vale is using an average of the previous quarter lagged by a month (March-May – Q3 prices). BHP and Rio are using an average of the calendar quarter (April to June). Although there was press coverage today suggesting that some Chinese mills had agreed with the Australian miners to adopt monthly index pricing to avoid the margin squeeze caused by the quarterly lag. Please also be aware that the prices quoted in these discussions are FOB Brazil and Australia respectively. The miners will back out the average freight rate and then make the adjustment for the Fe content.“

The Steel Index has spot reference prices of 62% Fe fines finishing May at $145.20 per dry metric ton (dmt) CFR Tianjin port in China. TSI showed the May average price for the same item at $161.59/dmt which was down 7% from the April average of $174.09/dmt. Last May the TSI average for May was $100/dmt lower than this year’s May average.

TSI monthly prices are the values used for settling the cleared swap contracts offered on the Singapore Exchange (SGX) and LCH.Clearnet in London as well as other Over-the-Counter (OTC) forward contracts.

Platts is the other spot iron ore index which is used to calculate prices. Platts had iron ore finishing the month at $145 per dry metric ton for 62% Fe fines and their monthly average was $161.95/dmt for the month of May.

According to Platts reports VALE, the large Brazilian mining company, is using their index to determine their 3rd Quarter prices. A recent article in Platts Steel Markets Daily stated, “Vale said it prices iron ore off a three month average of iron ore index values for the period ending a month before the start of the new quarter, which would mean Q3 would be priced off an index from March to May.

The mean of Platts IODEX assessments from March to May was $158.813/dmt CFR North China. The average of Platts 1%-Fe differential assessments over the same period was $4.922/dmt.”

Based on a Platts analysis, VALE could sell iron ore fines for the 3rd Quarter 37% higher than its 2nd Quarter prices if it does not make a change to its current pricing mechanism. (Sources: Nikkei Business Daily, The Steel Index, Platts Steel Markets Daily)

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