The niceties of iron ore pricing can struggle to command attention. Not this time. The agreement this week to move to quarterly contracts based on spot prices marks the end of the annual benchmark system that has lasted 40 years. Its consequences stretch from the price of steel to the development of a multi-billion-dollar derivatives market. The new regime is not perfect, but is better than one that has become outdated.
Ore miners Vale and BHP Billiton brought an end to the old regime with the deal they struck with Chinese and Japanese steelmakers. After reaching stalemate in the talks to set the latest annual prices, both sides agreed to three-monthly contracts linked to the prices in the iron ore spot market.
This move is possible only because over the past 10 years or so the spot market has developed to the point where it amounts to somewhere between 10 and 25 per cent of trade. Spot prices are not an ideal way to capture the dynamics of supply and demand. But they still have advantages over a benchmark number set several months earlier in a private deal, from which some industry participants are excluded. Costs and benefits of marginal changes will be clearer: small Australian miners, for example, will have more incentive to build capacity.