Freight charges are the focus for steelmakers

The focus of iron ore negotiations between Chinese steelmakers and global iron ore producers this year will shift to freight price stabilization, to keep steelmakers' costs low, the Economic Observer Newspaper reported.

China's steel mills and its steel lobby body, the China Iron and Steel Association (CISA), have accepted the mechanism of quarterly iron ore pricing, the report said. In January, the Australian miner BHP Billiton Ltd moved to a monthly set-pricing system after three mining companies abandoned a 40-year tradition of annual iron ore negotiations in March 2010 and turned to a quarterly pricing mechanism linked to iron ore indexes.

The CISA has previously insisted that Chinese steel mills should have long-term iron ore prices, which could stabilize their raw material costs.

The report said this year's negotiations are no longer about whether to accept quarterly pricing, but have shifted to freight costs. Shipping costs from Australia to China can vary widely, from $6 to $50 per ton.

The big three miners, BHP, Vale SA, and Rio Tinto Group currently offer FOB (free on board) prices to Chinese steelmakers, while the world's major three iron ore indexes calculate CFR (cost, freight) prices, using a formula based on the average spot market price over the previous quarter.

According to historical records, ocean freight costs will fall before the annual negotiations, but once they are completed, the price is likely to rise dramatically.

The recent rally in spot iron ore prices is likely to push up second-quarter contract rates to a record $165 a ton for ore FOB from Australian mines with an iron content of 62 percent, a Reuters poll reported.

Platts' 62 percent iron ore remains at $187.3 a ton, including freight, delivered to China, a record reached last week.

The Steel Index (TSI) 62 percent iron ore benchmark was also steady at $185.6 and Metal Bulletin's 62 percent ore was unchanged at $183.4.

The CISA is in discussion with Australian miners about the stabilization of freight charges to reduce volatility and keep costs stable, said an executive with a State-owned steelmaker, who declined to be named as the issue is sensitive.

The Brazilian company, Vale, in 2009 signed independent ore contracts with Chinese steel mills for fixed freight charges to further expand its presence in the country.

Some Chinese steelmakers have signed pricing contracts valid for three to four years with Vale for fixed freight, according to earlier reports.

Unlike BHP and Rio, which ship ore from Australia, Vale needs to transport iron ore from Brazil to China, resulting in much higher freight costs.

Vale is building 16 large ore carriers to reduce transportation costs between China and Brazil.

Freight costs from Brazil to China can vary from $10 to $110 per ton, based on historical records.