UPDATE:BHP Confirms Shift To More Flexible Iron Ore Pricing
July 29 2009 - 6:17AM
Dow Jones News
BHP Billiton Ltd. (BHP) has taken a significant step forward in
its campaign to change the way iron ore is priced, announcing that
30% of its sales this year will be through a mix of index-linked
pricing, quarterly contracts and spot sales.
The announcement confirms an emerging view in the market that
this year marks the beginning of a move away from the old system
where miners used to sell as much as 80% or more of their annual
production through long-term contracts, resulting in uniform prices
for all the steel mills that had access to term contracts.
BHP Chief Executive Marius Kloppers has long argued that the
current annual benchmark pricing system is outdated and that more
regular re-pricing is needed to reflect market movements during the
year.
"The company believes that (the) current settlements are
indicative of continued progress towards transparent market
pricing," BHP said in a statement Wednesday.
"It means that the market has changed forever and we have now
moved towards a structure which is a blend of different types of
contracts with some related to this indexed or spot mechanism which
creates more volatility but also more transparency," said Macquarie
Equities Senior Mining Analyst Brendan Harris.
The old pricing mechanism began cracking last year when
Australian miners BHP and Rio Tinto Ltd. (RTP) broke ranks with
Brazil's Vale S.A (VALE) and successfully secured larger price
increases from Asian buyers.
Prior to that, Chinese steel mills had unsuccessfully demanded
lower prices than those offered to their Japanese and South Korean
counterparts, but were eventually forced to accept similar terms as
their Asian peers.
BHP said it has so far settled 23% of its sales under the
traditional annual benchmark system at prices in line with those
already agreed between Rio Tinto and Japanese steel mills.
Rio Tinto has agreed to a price cut of 33% for iron ore fines
with Japanese, Korean and Taiwanese steel makers, resulting in a
new free-on-board price of about US$61.1 a ton.
Talks are ongoing with customers over the remaining 47% of its
iron ore volumes, BHP said.
While the company declined to discuss details of individual
agreements, a source close to negotiations said the 30% include
some Chinese mills which have accepted quarterly and index-linked
pricing.
The full-year contracts, accounting for 23% of production, are
with mills in Japan and South Korea, the source said, adding the
47% still unresolved are mostly Chinese mills.
Iron ore miners have been locked in a protracted standoff with
Chinese steel makers in annual price talks this year with both
sides failing to reach an agreement even after a three-month grace
period from the April 1 start of the current contract year.
With frustration growing, several Chinese mills recently
confirmed they had reached provisional price agreements with
producers on the same terms as those offered to other Asian mills,
but insisted these agreements were subject to any final deal that
is reached by China Iron & Steel Association, the country's
lead negotiator this year.
CISA is still demanding larger price cuts than the 33% offered
by Rio Tinto and BHP.
Talks this year have been further complicated by China's recent
detention of four Rio Tinto executives on suspicion of bribery and
securing Chinese trade secrets related to iron ore price
negotiations. The four are yet to be charged, but remain in custody
nearly a month after their detention.
Some Chinese steel industry executives have already said they
are looking for quarterly price agreements which would more closely
reflect market fundamentals.
Macquarie's Harris said BHP's announcement shows the pricing
stand-off with China is ongoing. But he noted the shift of
significant tonnages to indexed and quarterly pricing was still a
major development in the fast evolving iron ore market.
"This is confirmation that there will be significant volumes
that will float at indexed or spot pricing, which is currently well
above benchmark," prices, he said.
According to Metal Bulletin data, spot prices rose to a high of
$95 a metric ton last Friday, taking it significantly higher than a
landed price of about $76/ton for Australian ore sold under
contract, based on current freight rates to China.
BHP has been among the first to suggest a move to index-linked
pricing several years ago, but that plea found few takers in
earlier years with both producers and key consumers preferring the
predictability offered by a term contract.
But with both sides finding it increasingly difficult to reach
mutually agreeable term prices in recent years, the move towards
flexible pricing has received a significant boost, especially after
BHP and Rio Tinto sold significant quantities or iron ore in the
spot market during the first half of this year.
According to industry estimates, Rio Tinto sold half its ore in
the spot market in the first six months of 2009 while BHP sold 32%
in the spot market, in the year ended June 30.
-By Alex Wilson, Dow Jones Newswires; 61-3-9292-2094;
alex.wilson@dowjones.com