If iron ore benchmark system ends, we will have to follow: Vale

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Friday, 06 March 2009

Brazilian miner Vale, the staunchest supporter of annual pricing of iron ore (the benchmark system), admits that an eventual migration to a new pricing system, such as spot or index-based, is out its hands and that at the end of the day, Vale would have to follow the direction taken by the market, Fidel Blanco, managing director of iron ore sales, said Thursday at Handelsblatt's Stahlmarkt conference in Dusseldorf.
"If one decision prevails, we will have to follow. We might regret it, but we will do it," Blanco said, adding that the decision lay in the hands of buyers. "Vale is a supporter of the benchmark system. This has been quite harmonic until now, and we are not sure that the steel industry wants a commoditization of iron ore." Blanco added that pricing based on the spot market had become attractive this year because of the difference with contract rates.
Talking about the alternatives to the benchmark system, Blanco said pricing based off indices was dangerous because indices were not representative of the market. "They are based on reported sales of Indian iron ore by traders into a couple of Chinese ports. Is this reliable enough? Does it represent the market situation? We don't think so," he said.    
RECOVERY EXPECTED, BUT TIMESCALE UNKNOWN
A recovery in steel and iron ore demand will take place in the long run, with urbanization and industrialization set to continue long-term, Blanco said, without being able to provide a timeline more precise than "no sooner than Q2 2009."
He cited the various stimuli packages being implemented worldwide as providing some support for this recovery, with a particular focus on China's, which he said involved 45% to be spent on infrastructure and 25% on earthquake reconstruction -- both steel-intensive areas.
He added that lower energy prices and interest rates, as well as attractive prices for final goods, residential and mortgage markets, would also provide support to an eventual recovery.
Vale generated revenues of $38.5 billion in 2008, and $13 billion of EBITDA.
Source: Platts