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Platts Assessed The Weekly 62.5%-Fe Spot Lump Premium at $0.09/Dmtu CFR North China

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Core Tip: Miner Rio Tinto is to change the basis for the iron ore lump premium in its quarterly iron ore term contracts with Chinese mills to one b

Miner Rio Tinto is to change the basis for the iron ore lump premium in its quarterly iron ore term contracts with Chinese mills to one based on a monthly average of weekly Platts spot lump assessments, from a fixed premium level set on a quarterly basis, sources at steelmakers said.

The move by the world's second-largest iron ore miner followed a widespread push by Chinese mills for the switch after second-quarter lump premiums were initially settled at the end of March at a fixed level of $0.229-0.23/dry metric ton unit, basis the Platts 62%-Fe Iron Ore Index.

The steelmakers' efforts were anchored by the fact spot lump premiums have softened significantly in the second quarter amid weak demand, and the Q2 term premiums were viewed as unreasonable.

Platts assessed the weekly 62.5%-Fe spot lump premium at $0.09/dmtu CFR North China Wednesday, down $0.005/dmtu on the week.

The weekly spot lump premium, basis the Platts IODEX, has been falling steadily from $0.295/dmtu CFR North China on January 20 to $0.205/dmtu on March 26 -- around the time Rio Tinto's Q2 term contracts were concluded -- to the current $0.095/dmtu, Platts data showed.

The "collective request" to make the switch to index-linked pricing had come from all of Rio Tinto's Chinese term customers, a source at a major steelmaker in east China said, adding there was not much room for Rio Tinto to refuse.

The switch to index-linked pricing, however, will only start for lump cargoes delivered from June, mill sources said. April and May-delivery cargoes will still follow the $0.229-0.23/dmtu quarterly settlement.

Rebecca Murphy, a Perth-based spokeswoman for Rio Tinto, would not comment.

RIO TINTO ASKS FOR ADDITIONAL PREMIUM

In addition to the monthly average of the Platts spot lump assessments for term cargoes, mill customers of Rio Tinto said it will impose an additional general premium of $0.005/dmtu.

"We are just happy that Rio Tinto has permitted us to use spot index-linked pricing for term lump," a source at a Hebei-based steelmaker said. "I think [the $0.005/dmtu] premium is quite reasonable and we have accepted it."

Some sources said Rio Tinto's flagship Pilbara Blend lump -- typically containing 62.5% iron -- usually commanded a higher price than other lump cargoes in the spot market and had reasonable trade liquidity.

But a source at a large steelmaker in central China said it was not happy about the $0.005/dmtu. "It is just not reasonable."

Rio Tinto "should just follow the spot average and that is it", the source said, adding that in March fellow global miner BHP Billiton had allowed term customers to pay a premium derived solely from the monthly average of weekly Platts spot lump assessments.

A source at another Chinese steelmaker said the quality of PB lump was not that much better than BHP Billiton's 63.2%-Fe Newman Blend lump. So, if the latter was priced wholly on the Platts spot lump premium assessments, it was not acceptable for an additional premium to be imposed for PB lump.

Not all Chinese mills have heard from Rio Tinto about the change.

A source from a medium-sized mill in central China, which has not been informed, said the company was puzzled because it was one of the first requesting the switch and its offtake volume was "not low".

"I think [Rio Tinto] may be testing market response by offering this switch to only a few mills," the source said. "Although we have constantly been in talks with them about this, we cannot make a move to request the switch as it is a sensitive issue. So, the ball is in their court."

 
Keyword: Iron Ore, Rio Tinto
 
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