Steelmakers outside of China have mostly been spared paying the premium Vale has sought for its top quality Carajas sinter feed for now, although many that Platts spoke to over the past month are wary that it may soon apply to them.
Since the fourth quarter of 2013, Vale started imposing a premium of $4.50/dry mt on top of the formula it uses to calculate the price of Iron Ore Carajas, mainly for long-term contracts with steelmakers in China.
The premium was doubled for Q1 2014 to $9/dmt to the average of Platts 62%-Fe Iron Ore Index and an adjustment using the 1%-Fe differential, but most mills in Japan, South Korea, Taiwan and Europe said they have continued to use the formula without the premium. Some added that Vale has not raised the topic in recent interactions.
The exceptions were a small number of non-Chinese mills that were told to pay the premium in order to obtain additional cargoes beyond their term contractual volumes.
A Rio de Janeiro-based spokeswoman declined to comment on the matter in a January 18 response to e-mailed queries.
"What we are looking at today is when you put Carajas for sale on a spot basis, we see the market is giving more value," said Jose Carlos Martins, Vale's executive director for ferrous and strategy in a December 2 interview with Platts.
"So, then what we are doing is talking with our long-term customers to make them understand that the Carajas value is more than the market is paying today. And you really get some agreements with a better price than the existing formula price that we are using," he said.
A source at a major Chinese mill said last week that it would resist Vale's demands for a $9/dmt premium for IOCJ deliverable in the present quarter, because prices have since come down to $6-7/dmt in the spot market.
"We will argue with Vale for a lower premium," said the mill source. "There's now ready supply of IOCJ in the spot market."
Mills outside of China meanwhile noted that while Vale has not said anything firm about implementing a premium for IOCJ bought on existing term contracts, it was also not something that has been ruled out for the future.
CARAJAS QUALITY TO DECLINE
Any proposal to introduce a premium to the price of Iron Ore Carajas would be opposed by those not paying it now, mainly because the brand would deteriorate in quality this year, non-Chinese customers of Vale said.
IOCJ will see iron content decline and that of alumina, silica and phosphorus increase, as environmental reasons prevent Vale from mining in some new areas, its customers said they were told.
"The timing would be strange," said a source at a Northeast Asian mill of the idea of implementing a premium on product when it would undergo quality degradation.
Based on Vale's estimates, iron content will fall to a typical of 64% from the current 64.7%, and be at a minimum of 62.9%, its customers said.
Silica will rise to a typical of 3.4% from 2.9%, alumina will increase to 1.9% from 1.2%, and phosphorus will gain to 0.06% from 0.047%, said mill sources who were briefed in the previous quarter as part of Vale's technical update.
Vale declined to comment on queries regarding the quality changes.
"It's not IOCJ any more," said a source at a Northeast Asian customer of Vale. "It's gone down to something like SSFT," referring to Standard Sinter Feed Tubarao, which has iron content of 63-63.5%.
Spot cargoes of IOCJ seen in the spot market over the past two months have so far contained at least 64.7% iron, with a few cargoes seeing higher iron content of as high as 65.96% for a spot cargo sold December 6, data compiled by Platts show.
Vale's plans to open new mines at its Cajaras project have faced problems after the discovery of caves that are archaeologically and environmentally important, and that need to be protected.
A European mill source noted, however, that IOCJ was probably not commanding a premium just because of its quality, but for its compatibility with other ores of 58%-Fe that have come on stream in the market.
"Carajas isn't rewarded for being Carajas, but for its use in the mix with lower-grade ore in the market," he said.
Vale's differential pricing policy creates an opportunity for arbitrage, as mills outside of China that buy IOCJ without paying a premium can theoretically sell it at a higher price to buyers there.
In reality, however, this is not done because non-Chinese mills generally have contracts to buy only the volume of ore that they need for production, mill sources said.
Some added that there are clauses in contracts which restrict them from reselling those cargoes.
"We're already short [on IOCJ], and only a single discharge port is named in the bill of lading," noted a Northeast Asian mill source.
Other mills have previously noted that while any contractual clause preventing a buyer of ore from reselling it can be enforced under international law, reprisal can take other forms, like the reduction of allocation volumes in future negotiations.