Brazilian giant Vale (NYSE: VALE) began to look at short-term iron ore price negotiations as last year the miner saw clients not honor long-term contracts and instead make purchases on the spot market, SLW brokerage steel market analyst Pedro Galdi said.

The move was a result of a slump in iron ore prices in 2009 caused by the global economic crisis.

“When prices were falling considerably in the first quarter last year, Chinese companies turned to the spot market. In the third quarter, when the economy started to rebound and prices began to rise, the Chinese started to favor benchmark negotiations again,” Galdi told BNamericas.

As a result, miners have begun to negotiate short-term contracts as they could reflect spot prices as well. “In addition, a shortage of 5% in global iron ore supply is expected for this year, helping sustain prices in an upward trend,” Galdi said.

Vale president Roger Agnelli has defended quarterly adjustments as demand has been growing faster than production, causing the sharp price hikes.

Consequently, global miners have resumed investment plans to boost iron ore production capacities, but the expected supply increases are not going to be enough to force prices down significantly next year, Galdi said.

According to the analyst, Vale had always favored the long-term contracts that allow for a better cash flow forecast for a whole year, which ends up providing a more accurate cost outlook for steelmakers as well.

In Brazil, the price hikes are expected to be positive for steel company CSN (NYSE: SID), as it has its own mining operations. Usiminas (Bovespa: USIM5) is also working to be independent on iron ore supply and is investing in its own mining projects.

However, higher costs – including expected rises in coal prices – will lead steelmakers to pass down such increases to clients.

From April, steel prices are expected to rise 10-15% on the domestic market, Galdi added.

On Tuesday international press reported that Vale and multinational resource group BHP Billiton (NYSE: BHP) had reached agreements with Asian steelmakers on iron ore prices and put an end to the benchmark system.

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