For more than 40 years, iron ore prices have been settled in secretive – and often acrimonious – negotiations between global steelmakers and miners. The tradition fell apart yesterday as BHP Billiton said the iron ore price for a third of its customers would be determined by prices on the spot market.
The move – a victory for BHP's chief executive Marius Kloppers – has an unexpected winner: Wall Street's banks. Analysts and bankers say it will be a critical boost to the nascent derivatives swap market, where investors can bet on the direction of iron ore prices.
“While the futures market for iron ore is still small, we expect it to become increasingly important as the nature of iron ore contract sales changes,” says Christopher LaFemina, mining analyst at Barclays Capital in London.