China Steelmakers Challenge Platts Iron Ore Pricing: Commodities

Photographer: Dado Galdieri/Bloomberg

Crushed iron ore is transported in railroad cars at Vale SA's Brucutu mine in Barao de Cocais, Brazil. Close

Crushed iron ore is transported in railroad cars at Vale SA's Brucutu mine in Barao de Cocais, Brazil.

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Photographer: Dado Galdieri/Bloomberg

Crushed iron ore is transported in railroad cars at Vale SA's Brucutu mine in Barao de Cocais, Brazil.

Chinese steelmakers, the world’s biggest iron ore buyers, are questioning the reliability of the main industry price index for the raw material provided by Platts, citing concerns about transparency and trading volume.

“We are skeptical because we don’t know the size of the deal samples and how they work out the indexed prices,” Wang Liqun, deputy general secretary of the China Iron & Steel Association, said in a phone interview. “If the daily price is based only on one deal a day, can you trust it?”

China started its own spot trading platform last year, introducing a weighted average daily price in March. Much of the global trade, valued at about $180 billion, continues using Platts, the publisher of energy prices that was raided this month as part of an oil price-fixing probe. It became the leading price index after producers including Vale SA and Rio Tinto Group (RIO) scrapped annual contract price talks in 2010.

Market participants including Jiangsu Shagang Group Co., China’s largest non-state-owned mill, have questioned whether buyers are sometimes paying too high a price.

“We found the indexes often dropped slower when the spot market falls, while it always rises quicker when the spot rates move up,” Shen Wenming, vice president of Jiangsu Shagang Group, said in an interview. “Indexed pricing dominates the market. Steelmakers don’t have a say but to follow.”

‘Evolved’ Pricing

Platts, owned by McGraw Hill Financial Inc. (MHFI), publishes benchmark prices used by the oil industry. It also assesses the cost of raw materials from coal to power, liquefied natural gas, shipping rates and iron ore. Platts said May 15 it’s cooperating with the European Commission’s probe, which also includes including BP Plc, Royal Dutch Shell Plc and Statoil ASA.

“Iron ore pricing has evolved quickly over the past few years,” Keith Tan, Platts’s managing editor for steel raw materials in Singapore, said by e-mail last week. “The quality of the information we obtain is key, and we’ve emphasized on considering transactions, bids and offers that are verifiable, transparent and firm.”

Platts continuously engages with the industry to explain its price assessments, Tan said. It’s confident it reports assessments that accurately reflect current spot market supply and demand as iron ore pricing changed in recent years, he said.

“Over the past two years, especially, Platts has increasingly reported on activity in the spot market furnishing full details like company name and cargo specifications, bringing unprecedented transparency to the iron ore market,” he said.

Expand Samples

Vale, Rio and BHP Billiton Ltd. (BHP), the three largest shippers of iron ore, in 2010 broke a 40-year custom of selling on annual contracts in the face of opposition from China, favoring instead sales at spot market rates through auctions and private talks. Larger Chinese mills are typically paying for contracts on a monthly or shorter-term basis using price indexes compiled by Platts.

Deal samples used by Platts account for 6 percent to 9 percent of total iron ore transactions, Qian Haifan, general manager at Maanshan Iron & Steel (600808) Co., said at a conference in Singapore on May 8. Prices are decided by very small trades, which is “unreasonable and unfair to China’s contract buyers,” he said that day, according to a transcript.

“Many Chinese mills are skeptical towards the representativeness and accuracy of Platts index,” Liu Daguang, deputy general manager of international trading at Angang Steel Co. (347), China’s largest Hong Kong-traded mill, said at the same conference. “Platts should expand its deal samples to include spot transactions at Chinese ports and to be more transparent.”

Dominant Index

“The Platts index is still dominant on the market because the top three miners are using it, so steelmakers have to follow,” said Yang Shufang, vice president of researcher Custeel.com, which also operates an iron ore index. “For most existing iron ore indexes, it’s hard to track all details of samples, such as who’s buying and who’s selling.”

BHP, the world’s largest mining company, in March rebuffed claims by China that the biggest suppliers have manipulated prices. A recent surge in the cost of iron ore was caused by changes in demand, market speculation and “unreasonable” pricing methods, China’s top planning body had said.

There were 1.075 billion metric tons of iron ore traded globally in 2011, according to data compiled by Bloomberg Industries, giving the market a value of about $180 billion according to Bloomberg calculations based on average prices of a $167.60 a dry ton that year.

‘Greater Transparency’

The Chinese platform, operated by the China Beijing International Mining Exchange, together with Singapore’s GlobalORE, has a combined trading volume of 10 million tons a year, CISA’s Wang said. He’d like to see volumes increase.

“Platts has brought greater transparency to iron ore pricing since the market has moved from long-term pricing to short-term pricing,” Joseph Innace, editorial director for metals, said in e-mail yesterday. “Other sources of data lack details on counterparty information and cargo specifications.”

Innace said Platts’s IODEX and TSI index services, which use different information-gathering methodologies, “have each achieved significant market acceptance.”

Bloomberg LP, the parent of Bloomberg News, competes with Platts and other companies in providing energy markets news and information.

To contact Bloomberg News staff for this story: Helen Yuan in Shanghai at hyuan@bloomberg.net

To contact the editors responsible for this story: Jason Rogers at jrogers73@bloomberg.net; Andrew Hobbs at ahobbs4@bloomberg.net

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