Speculations are brewing in the iron ore mining and steel mills industries that China has been offered to purchase the iron ore raw material for fourth-quarter contracts at a much cheaper rate.

According to Business Recorder, iron ore miners reportedly are selling to Chinese steel mills their products at $175 a tonne for iron ore. But Chinese mills are not buying since the current rate is less than $160 a tonne. The fourth-quarter contract rate, according to the Chinese, is based on June-August average spot prices.

Reuters said three sources from the Chinese steel mills confirmed the proposal, namedropping in particular, Vale SA.

The source said other iron ore miners have also expressed voluntary reducing their fourth-quarter pricing based on October-December spot rates, but did not specifically named the companies' entities.

A spokesperson for Vale did not comment on the issue. But what's certain is that the move being initiated by the global iron ore miners could trigger an adjustment to the iron ore pricing system less than two years after the industry dumped discussed benchmark rates.

It also meant a weakening in global iron ore demand as China's economy slows down. China's is the world's top steelmaker and as such, the world's biggest buyer of iron ore. It contributes heavily into the cash coffers of Vale, Rio Tinto and BHP Billiton. The three global miners control two-thirds of the global seaborne market of iron ore.

Reuters gathered from a Chinese executive in one of China's largest steel mills that it would still purchase iron ore based on index, but with the reference period changed to October through December, as Chinese mills reportedly were mulling to renegotiate fourth-quarter iron ore contracts.

China's Trade Surplus Skids

On Thursday, China's trade surplus for a second month in September slid to $14.5 billion, lower than August and less than half over July. Exports failed to meet the expected 17.1 per cent compared a year ago.

Analysts said with the iron ore miners offering to sell their products at a much cheaper cost are not something related to customer loyalty valuation. Rather, it reflects the miners' admission that iron ore prices are going the downhill.

On Friday, ore with 62 percent iron content dropped 1.69 per cent, its fifth-straight daily decline. It has fallen 13 per cent since early September, and it now at its lowest levels in 11 months. At $157.50 a tonne the day before, iron ore is nearly a fifth cheaper compared to its record high of $191.90 a tonne on February 16.

This leads analysts and experts to conclude the iron ore mining industry is looking towards scrapping the quarterly contract pricing system and moving into a monthly system that will immediately reflect changes in spot prices. Iron ore miners adopted the quarterly pricing scheme just last year after moving from a 40-year-old custom of negotiating benchmark prices annually every year.

Incidentally, BHP Billiton announced last Friday it will launch a new iron ore global pricing system by year end or early 2012, priced on a monthly basis.

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