Iron ore heads toward exchange as price talks

By Nick Trevethan - Analysis

SINGAPORE (Reuters) - The annual battle to settle iron ore prices appears headed towards deadlock, but exchanges are quietly looking at developing contracts that could change the way the industry sets prices.

Analysts tipped the Singapore Exchange (SGXL.SI) as most likely to be first to carry an over the counter iron ore contract, which would create a more transparent pricing mechanism for the more than $200 billion (101.6 billion pounds) industry and let some of the heat out of what some see as over-inflated spot prices.

"The dynamic in the iron ore market is changing from one dominated by long-term supply contracts, to the point today where rampant demand has created a viable spot market," ANZ's senior commodities analyst Mark Pervan said. "What has accentuated the need for a contract, especially in Asia, is the increase in freight spreads for iron ore from producers in different parts of the world," he added. Earlier this year, Chinese steelmills settled annual contracts with Brazilian miner Vale (VALE5.SA)RIO.N at levels 65 to 71 percent up from last year.

But they are yet to settle with Australian miners who argue that the lower cost of freight from Australia to China, versus Brazil to China, should be reflected in higher prices for Australian material, a sticking point for the Chinese.

The freight differential has always been there, but has been given extra prominence by an 1,100 percent rise in the Baltic Dry Cargo Index .BADI in the past six years.

Last month Deutsche Bank launched an over-the-counter iron ore contract and the bank said exchanges were looking at developing their own.

"A number of exchanges will be looking into some form of iron ore contract. There is a lot of demand for this kind of product, which we are already seeing in our newly launched OTC iron ore product," Raymond Key, Global Head of Metals Trading at Deutsche Bank said.

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