According to a study by Luke Hurst of Australian National University, changes in the way iron ore is priced have delivered far greater revenues for Australian exporters and given them a significant advantage over Brazilian producers.
In 2010, mining heavyweight BHP Billiton (ASX: BHP) led a campaign to replace the benchmark system with the spot market pricing system that we have today. Under the old system, it was the responsibility of the customer (in this case, Chinese steel mills) to pay for freight charges as they were the ones that owned the ships. Under the new system however, that responsibility shifted to the producer – for example, BHP, Rio Tinto (ASX: RIO) or Fortescue Metals Group (ASX: FMG).
As such, prices are now based on the spot market, are non-negotiable and are recorded daily by indices compiled by organisations such as The Steel Index. Australia's closer proximity to China however, gives our exporters a significant advantage over Brazilian producers.
Hurst said "Since the switch to the spot market mechanism, Australian exporters have received on average US$13.29 a tonne more than Brazilian exporters for the same quality ore to China."
It was estimated that the commodity's price increased by around 7.1% and added the equivalent of US$7.1 billion to the revenue of Australian exporters between April 2010 (when the system was introduced) and December 2011, reflecting the positive effects of the new system for Australia. At the same time, it cost Chinese importers around US$444 million per month for the system's first 18 months.
Foolish takeaway
Shares in iron ore miners have increased substantially over the last few months, as the companies have heavily focused on decreasing costs of production. Meanwhile, the commodity's price has remained far stronger than most analysts had anticipated, which will also reflect positively on the companies' profits.
However, given the volatility still facing the sector, the shares are not so attractive at today's prices and investors would be wise to remain on the sidelines for a lower entry point.
