Oct 31, 2011 (Bloomberg) -- China, the world’s biggest iron ore buyer, said it’s held talks with Vale SA (VALE3), Rio Tinto Group and BHP Billiton Ltd. (BHP) to set up a new pricing mechanism after a plunge in cash market prices.

"We hope to build a new stable, transparent, fair and reasonable pricing mechanism,” Zhang Changfu, vice chairman and secretary general of the China Iron and Steel Association, told reporters today in Beijing. “We wish to make it more well-organized and healthy.”

Iron ore prices for immediate delivery fell 32 percent this month on China’s credit tightening and slowing steel demand from builders and automakers. Most Chinese customers are seeking to replace quarterly contracts with spot pricing, the largest ore producer, Vale, said last week.

Baoshan Iron & Steel Co., China’s biggest mill, is in talks with Vale on fourth-quarter ore prices, and expects its raw- material costs to drop under a new pricing model, General Manager Ma Guoqiang said today in a webcast meeting with investors. He didn’t provide further details on the new model.

Vale, together with BHP and Rio, in 2010 abandoned a 40- year custom of setting prices annually in favor of quarterly iron ore contracts as spot prices gained. The quarterly contracts are based on a three-month average of spot price indexes for the period ending a month before the onset of the new quarter.

Accelerating Moves

The plunge in iron ore prices is accelerating a move to shorter pricing methods and closer to spot, Rio’s Chief Executive Officer Tom Albanese told analysts last week. Rio, the second-largest iron ore producer, sold about 86 percent of its output on a quarterly basis, he said.

BHP, the world’s largest mining company and third biggest iron ore producer, is selling the “vast majority” of its iron ore on monthly prices, Chief Executive Officer Marius Kloppers said this month. The top three producers control about 62 percent of the total seaborne trade, according to Bloomberg Industries.

Iron ore prices may drop to as low as $95 a metric ton, the lowest in more than two years, in the short term before rebounding next year, Morgan Stanley analysts Peter Richardson and Joel Crane said today in an e-mailed report. They traded at $116.90 a ton on Oct. 28, according to The Steel Index Ltd. and have fallen for 15 days, the longest streak since July 2010,

'Turning Point’

The “turning point” of a global iron ore shortage may come at the end of next year or 2013 as new mining projects come on stream, Baoshan’s Ma said today. The company had previously forecast the market to move into surplus in 2014.

Rising competition and raw material costs squeezed profit margins for China’s medium and large steelmakers to 2.53 percent in September and 2.99 percent in the first nine months, Ma said. Shanghai-based Baoshan’s profit fell 51 percent to 1.24 billion yuan in the third quarter from a year ago, the company said Oct. 28.

Chinese prices of hot-rolled coil, a benchmark product, gained 2.2 percent last week, the first weekly gain since the start of September, narrowing the price decline to 13 percent in the past two months, according to researcher Beijing Antaike Information Development Co.

China’s Hebei province, the biggest steelmaking region, has shuttered more than 20 iron furnaces and 20 rolling plants, partly because of the price plunge, CISA’s Zhang said today.