Update Vale (VALE)

03/04/2010 3:23 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

I think we’ve just seen the end of the fixed long-term contract pricing system for iron ore. That pricing system may not know it’s dead yet. But right now it’s dead system walking.

Brazil’s Vale (VALE) has told domestic customers that it will raise iron ore prices by 40% in March and 40% in April. That will bring contract prices for these customers into line with iron ore prices on the spot market.

No waiting for the annual negotiations with Korean, Japanese and (until recently) Chinese steelmakers to set a price for long-term contracts.

Now iron ore for Brazilian customers on long-term contracts will sell at a price close to the spot price set by the global market. BHP Billiton has already signaled that it believes spot pricing is the future in this market. The Australian miner is trying to move the bulk of its business to this market-price system.

The consequences?

Huge increases in raw materials costs for steelmakers that will get passed down the line to their customers in the auto, appliance, heavy equipment, and construction industries.

And an intensification of an already intense effort by China, India, and other big iron ore consumers to find alternative suppliers beyond the big three of BHP Billiton, Vale, and Rio Tinto (RTP).

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