Indian contract iron ore sales need unique benchmark price -- company official

News was prepared under the information support of Online Daily Newspaper on Hellenic and international Shipping "Hellenic Shipping News".

29 Apr 2008

While spot price sales of Indian iron ore to China are justified by market conditions, India needs to move toward more contract sales, said KK Kumar, general manager of MSPL Ltd, a leading iron ore producer on the subcontinent. 'India should develop a benchmark, long-term pricing plan with China that would follow annual contract prices,' Kumar said. He acknowledged that Indian spot sales to China, which unlike contract prices don't lock in shipping rates for a 12-month period, present sharp price differentials when compared with Australian and Brazilian exports to China.
'Last month, Indian freight rates to China averaged 77 usd per ton, compared with 30 usd from Western Australia. The increase in demand and a ship shortage have caused high-orbit freight rates,' Kumar told an industry summit here.
But he defended India's favored practice of selling at the spot rate to China, saying it 'fills supply-demand gaps in China,' and is a 'fair indication' of market prices for the commodity.
Kumar said that Indian iron ore was more expensive than the Australian and Brazilian products because of unique conditions in the country.
'Indian iron ore is more expensive because mines are very small and numerous. Economies of scale are not possible. There is also a heavy reliance on railways whose freight rates are always rising, which adds to the cost of Indian iron ore.'
He said that getting the product from mine to port was nearly six times more costly in India.
'In India, iron ore transport costs 6 usd per ton per 100 kilometers, compared to an average of just 1.10 usd in Australia and Brazil. Therefore, it's just not possible for Indian iron ore to use a similar pricing structure. It is necessary to develop a benchmark price which is unique to India,' Kumar said.
He proposed working toward a long-term benchmark contract price for Indian iron ore in China of around 140 usd per ton for high quality material -- iron ore with at least 65 pct Fe (iron) content.
He added that India's landed price in China should take into consideration the fact that shipping time to China is only around 12 days, versus over 40 days from Brazil.

Source: Forbes