Charlotte Mathews
30 July 2009
Johannesburg — GLOBAL resources group BHP Billiton yesterday signalled a move away from the industry-wide norm of annual iron-ore contracts by announcing it had agreed with some customers on a mixture of annual and short-term pricing.
This is the first time the group has announced a mixture of pricing rather than a benchmark annual price settlement, although last year it sold up to 15% of its production on the spot market.
The change reflects unusually tough negotiations over this year's annual iron-ore contracts starting on April 1 . After a sharp drop in global steel production between September and May, mills are beginning to pick up speed and demand is pushing up spot prices.
The change in Billiton's pricing structure also indicates the desire of some iron-ore producers and buyers to move away from benchmark pricing to index pricing. Benchmark pricing is based on annual contracts signed between the biggest producers and buyers, whereas index pricing is based on updated indices compiled by specialist industry publications.
"Current settlements are indicative of continued progress towards transparent market pricing," Billiton said.
The company said it would sell 23% of its total iron-ore volumes at an agreed annual contract price, which for fines would be about a third lower than last year and for lump about 44% lower.
Another 30% of its production would be sold on a mix of quarterly negotiated pricing, spot prices and index-based pricing. Negotiations for the remaining 47% of iron-ore production were continuing, it said.
In last year's negotiations, which were concluded before the global economic slowdown, Rio Tinto and BHP Billiton secured an 85% hike in prices.
In May, Rio Tinto agreed with one of the biggest steel groups, Nippon Steel of Japan, on a 33% cut in iron-ore fines sold on annual contract, which set the trend for other industry negotiations.
Chinese producers said they wanted contract price cuts of at least 45% this year. But Fairfax analyst John Meyer said in a note that Chinese seaborne imports of iron ore rose 26% in the June quarter compared to March, and rising prices were making it more urgent for them to conclude agreements.
Meyer said BHP Billiton, Rio Tinto and Vale were in danger of being seen as enemies of the Chinese state as it had become a matter of national pride in this round of iron-ore negotiations to get better prices than the Japanese and Koreans had negotiated. Recently, Rio Tinto executives were arrested in China on charges of spying and bribery.
Kumba Iron Ore, which is the world's fourth-largest producer, negotiates its contracts with customers after the majors have concluded their agreements and follows those pricing trends, although it can command a premium for the quality of its iron ore.
Bloomberg reported JPMorgan Chase this week raised profit estimates for Billiton and Rio Tinto because of rising iron-ore prices.
Rio's net income for the next calendar year was forecast 39% higher than originally expected to 6,7bn, and Billiton's net income forecast for the year to June next year was 37% higher than originally predicted at 8,3bn.
BHP stock was trading 1,9% weaker at R196,85 on the JSE by midafternoon yesterday.
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