The replacement of the 40-year-old practice of annual price contracts for iron ore with quarterly contracts marks a radical departure in pricing patterns in the global iron ore markets. The move to quarterly contracts will likely improve the price discovery for a raw material in great demand, especially in fast growing emerging economies like China and India. Of these two countries, India is placed to reap greater gains from the change as the country is a net exporter of iron ore, supplying more than 100 million tonnes of iron ore to global markets, especially China. In fact, 50% of the value of India's exports to China consists of iron ore. Of course, Indian steel producers will be affected by this change in pricing policy, which will lead not just to a rise in input prices but also potential volatility in prices. However, its impact can be limited to some extent if the steel producers hedge risks through sophisticated financial instruments. In any case, artificially suppressing prices of inputs to favour certain producers is bad economics. And it is only reasonable that iron ore prices are fixed on a quarterly, not annual basis—in recent times the annual price has in a lot of cases been well below the spot market price. Price volatility of inputs is a problem faced by a number of industries, but that is never a sufficient reason for attempting some kind of price control.
Of course, there are concerns that a majority of global iron ore reserves are controlled by a cartel of three major suppliers—Vale, Rio Tinto and BHP Billiton—which between them account for two-thirds of global iron ore exports. Relevant competition authorities must ensure that prices set on a quarterly basis do not become exorbitant, cartelised prices. But this is not reason enough to block the move to a quarterly contract system. If anything, there is a need to move to a more transparent system of allotting iron ore mines, both to steel mills and mining companies across the world. In many countries, this process continues to be opaque with most governments providing licences on a first-come first-served basis, often giving preference to applicants who would provide larger value addition by setting up processing units within their borders. So, pricing reform, while welcome, should also be accompanied by policy steps that ensure greater competition in iron ore mining in major producing states.
