The Rising Influence of Rising Affluence

[DewDiligence]

BHP Breaks Pricing Logjam for Iron-Ore Industry

[This is a major change insofar as the big-3 iron miners (VALE RTP BHP) have not previously agreed to set prices with their main customers as often as quarterly. Notably absent from the current deal are the Chinese steelmakers, but they too will to fall in line soon, IMHO.]

http://online.wsj.com/article/SB124885718739289589.html

›JULY 30, 2009
By ROBERT GUY MATTHEWS

BHP Billiton Ltd., the world's largest miner, said it settled iron-ore price negotiations with more than half of its steel industry customers, with a portion of buyers agreeing to annual contract rates that are 33% below last year's prices and the remaining agreeing to negotiate prices quarterly.

The deal to set prices quarterly based on the spot market and indexed futures markets represents a breakthrough for BHP and the industry. Spot market prices more immediately reflect high and lower demand and would allow BHP to more quickly capitalize on upswings in demand. It would also allow steelmakers to save when demand is low.

The agreements weaken the decades-old system of settling iron ore prices on an annual basis, which BHP has increasingly criticized as outdated. [The word “weaken” is an understatement, IMO.]

The "current settlements are indicative of continued progress towards transparent market pricing," BHP said in a statement Wednesday.

While some of BHP's steel customers will still purchase their iron ore annually, more steelmakers are opting out of the system and hoping that they will be able to buy iron ore at below contract prices.

As a result, steel prices worldwide may become more volatile as the raw material, iron ore, fluctuates along the lines of supply and demand [duh]. BHP is hoping that it will boost its profits in more frequent negotiations.

The miner said the recent negotiations reflect only about half of its volume and that negotiations are continuing for the remaining 47% of its iron ore volumes with steel customers, including those in China.

Chinese steelmakers are BHP's largest and most important customers. The two sides have been wrestling for months over the price of iron ore, a necessary ingredient in the production of steel.

Chinese steelmakers have been seeking a 50% discount [they will not get that, IMO], to reflect the weakened world economy and their growing dominance in the purchase of iron ore -- far steeper than the 33% BHP announced Wednesday. The 33% figure is in line with contracts between Rio Tinto Ltd. and Japanese, Korean and Taiwanese steelmakers [#msg-38113508].

China has very few national resources for iron ore and is dependent on the world's biggest miners, including Rio Tinto and Brazils' Vale SA to supply its mills. The mills are equally dependent on China's voracious appetite for steel. But the two sides have been locked in brinkmanship.

Chinese steel mills for months have been trying to flex their muscle by insisting on deeper discounts from last year's high iron ore contract prices, which were about $80-$90 a metric ton.

Generally, one miner agrees on an iron ore price with a Chinese mill and then that price is adopted worldwide. Prices for 2009 should have been settled in April of this year, but the negotiations dragged.

Other steel mills, namely in Japan, were worried about supply and uncertainty and broke rank by settling for its own annual prices with Rio Tinto. The price discount is similar to BHP's current annual deal with its customers.‹