China won’t be pleased.
According to media reports major iron ore exporters, including BHP Billiton and Rio Tinto, have reached a preliminary agreement to move away from annual contract pricing to quarterly arrangements.
The short term contracts would be linked to the spot price: a move, which translated into an actual new system, would see iron ore prices more than double from the present $US60 a tonne top $US130 a tonne or more.
The Financial Times reported unknown company executives as confirming the move away from annual pricing agreements.
If the new system evolves, it will in fact mirror the quarterly pricing arrangement BHP won earlier this month for coking coal with customers in Japan, Europe and Korea.
That saw BHP win price rises of 55% for hard coking coal, the best quality coal there is for the steel industry.
The FT said in its report that "The miners, including Vale of Brazil and UK-based BHP Billiton and Rio Tinto and steelmakers such as Nippon Steel, JFE, Sumitomo Metals and Kobe still need to resolve significant obstacles to reach a final agreement".
The FT said the deal was just with the Japanese mills. Posco, the giant South Korean steel group, plus Arcelor Mittal, the world’s biggest steel maker and other mills in Europe, have not yet agreed to the new pricing structure.
Under the current iron ore contract system, the first price agreed between a miner and a steelmaker became a benchmark followed by the rest of the industry for a year.
That’s why the 33% cut agreed to by the Japanese mills and the big iron ore companies last year became the industry benchmark, even though China had insisted on a 45% cut.
That demand went unanswered and the Chinese and the big iron ore groups went to a mixed system of unofficial pricing based on spot prices and the Japanese price cut.
A surge in the spot price soon saw BHP and Rio shift more and more ore sales onto that market, so much so that 50% or more of their sales were being made at spot market pricing.
Surging demand for steel and iron ore from China, and then Japan and Korea later in 2009 saw prices continue to rise.
A tax on exports in India saw prices jump sharply, to around $US130 a tonne and more (including freight from Australia).
Current spot prices are around $US143.80 a tonne are, when adjusted for the cost of freight, more than double the $US60-$US62 a tonne 2009-10 year contract price in Japan which ends on March 31.
BHP shares fell 61c, or 1.4%, to $42.59. Rio shares fell $1.15, or 1.3%, to $75.03.
Footnote: BHP is not a UK-based company as claimed by the FT, it is based in Australia and is a dual-listed company.
