A representative from the China Iron and Steel Association recently revealed that BHP, one of the world’s four major iron ore miners, has for the first time adopted Chinese index-based pricing for iron ore, marking the first step toward China’s own iron ore pricing system.

According to the Shanghai Securities Journal, in September, BHP adopted the 62% Australian fines index from MySteel—a platform operated by Shanghai Steel Union—to price two shipments of iron ore via a private bidding process. This marks the first time that one of the four major international iron ore companies has used a Chinese index for pricing purposes. It is understood that several other major international mining companies, aside from BHP, are also in negotiations with Shanghai Steel Union, exploring the possibility of adopting the Shanghai Steel Union index.

Previously, BHP Billiton had been using the Platts index as its benchmark for pricing. The iron ore index compiled by Shanghai Steel Union and the Platts index share similar methodologies, but differ in their sampling approaches. The Platts index draws most of its samples from foreign companies, whereas Shanghai Steel Union’s samples are predominantly based on transaction prices from China’s steel mills and trading companies’ procurement markets. A comparison reveals that the annual price differences between the two indices are slightly different: Shanghai Steel Union’s iron ore index is $0.3 per ton lower than the Platts index.

Before 2010, the four major international iron ore suppliers would negotiate an “agreed price” with Chinese steel mills at the beginning of each year. This price remained largely unchanged throughout the year and was commonly referred to as the annual long-term contract. However, the sharp fluctuations in iron ore prices and shipping costs made it difficult to enforce these long-term contracts. As a result, the annual long-term iron ore contracts were terminated in March 2010, and monthly contracts priced according to the Platts index began to dominate the market. Yet, this pricing model has come under intense scrutiny.

As the world’s largest consumer of iron ore, China should actively strive to gain control over international iron ore pricing, thereby breaking free from its current situation in which the cost of China’s black industry—based on iron ore—is dictated by others.

Hu Yuyue, director of the Institute of Securities and Futures at Beijing University of Commerce and Industry, told the China Securities Journal that the current pattern of iron ore trading closely resembles that of crude oil in the 1980s. A universally recognized pricing center has yet to emerge, trading pricing methods are diversifying, and international trade volumes are increasing year by year. At the same time, the balance between supply and demand for iron ore is shifting, and pricing advantages are beginning to tilt from sellers to buyers.

In fact, China has long been striving to gain pricing power over iron ore. The Dalian Commodity Exchange has launched iron ore futures, the Shanghai Clearing House has introduced iron ore swaps, and the Beijing International Mining Rights Exchange has attracted investments from the world’s four major mining companies—Rio Tinto, BHP Billiton, Vale, and FMG. Another key direction of China’s efforts is to encourage international mining transactions to adopt Chinese indices.

According to data provided by researchers, the correlation between the prices of the main iron ore futures contracts and spot prices at Qingdao Port has risen from less than 0.8 in 2013 to over 0.99 today. Moreover, the correlation with all domestic and international iron ore price indices—including the Platts Index, TSI, China Iron and Steel Association, and Shanghai Steel Union—has also exceeded 0.98. As a result, futures prices have become an important reference for both spot trading and domestic and international price indices.

“The basis-price pricing model has begun a pilot program, and the operational patterns of the Platts Index—the primary benchmark for spot pricing—have started to undergo substantial changes, altering the index’s previous characteristics of rapid price increases and slow declines, as well as large gains and relatively small losses,” researchers believe.