ARTICLE
The New Deal
For anyone who is involved in trading on financial markets, whether that be through spread betting or CFD trading, it’s vital that you know what news will have an impact on your chosen market. Whilst you might not be able to react quicker than the market when news comes out, the better you know your market, the better you know what will happen after that first movement.
In recent years commodities have become one of the most popular markets in the world, fuelled in no small part by the growth of spread betting companies like Trade Fair. The simple laws of supply and demand, coupled with the economic demands and growth of the major economies have made prediction of the commodities market relatively easy, or at least, as easy as predicting the stock market gets.
That’s why the deal struck between Vale and BHP Billiton and some of the world’s biggest steelmakers to bring about the end of annual pricing is so important. The Iron Ore industry is one of the major commodities markets on the planet and it has always been somewhat volatile. To combat this major iron ore producers set annual prices for their contracts, hoping that the long span of a year would stop prices moving too much.
For a while this worked, until ‘spot’ pricing started appearing. The ‘spot’ price is the equivalent of the daily price of a barrel of oil, whilst an energy supplier might have a long term price, there’s always the day to day price to mark it against. Four years ago, only 4% of all iron ore was sold at spot price, now it’s pushed up to over a third and its upsetting steelmakers and iron ore producers in equal measure.
The simple reason for this is that when the spot price is higher than the annual contract price of the major iron ore companies then its bad news for the iron ore companies, and when it’s lower it’s bad news for the steelmakers, at any given time, someone is always going to be unhappy.
Accordingly (and presumably to try and win back more of the market from spot sellers) Vale and BHP Billiton (two of the three biggest iron ore producers in the world) have struck quarterly deals, hoping to stick closer to the spot price, and thus make the most of the market movements both for themselves and for their customers.
The loss of the year long set prices, however, could only serve to produce more volatility in the markets, with more flexibility for the spot price, particularly as each three-monthly contract comes to an end. For anyone paying attention to the commodities market, or to the mining sector, the end of each of these three month spells could see significant movement in the market, and a great opportunity to make a profit.
