Replies to post #471 on The Rising Influence of Rising Affluence

[DewDiligence]

BHP Continues Shift to Spot Pricing for Iron

[During 2H09, 46% of BHP’s iron output was sold at the spot price or some facsimile thereof, the highest proportion ever, by far. Inasmuch as the spot price has recently been almost double the contractual benchmark price, the increased reliance on spot pricing is obviously bullish for mining companies. For background, see #msg-43960884, #msg-39191719, #msg-38315328, and #msg-38113508.]

http://finance.yahoo.com/news/BHP-continues-shift-from-apf-3964120369.html?x=0&.v=1

›January 20, 2010

MELBOURNE, Australia (AP) -- Mining giant BHP Billiton Ltd. is continuing to shift from selling iron ore at annually agreed benchmark rates toward shorter-term arrangements amid debate over the long-standing price system.

The trend has continued since China, the world's largest iron ore importer, last year failed to negotiate deep cuts in the annual price its steelmakers pay the major ore producers. Analysts predict an upturn in ore prices as the global economy recovers in 2010.

BHP Billiton said Wednesday that only 54 percent of its iron ore shipped from Australia in the three months through December last year was sold at annually set prices. The remaining 46 percent was sold at shorter-term prices.

In July last year, the Melbourne-based company said 30 percent of its iron ore was sold on a mix of quarterly negotiated prices, spot prices and index-based pricing. BHP is the world's largest miner and third largest iron ore exporter.

The latest sales figures come amid ongoing debate about the four-decades-old benchmark pricing system.

Tensions between China and its foreign iron ore suppliers were heightened by China's detention in July last year of four employees of Rio Tinto Ltd., the world's No. 2 iron ore miner and lead negotiator for global miners in price talks, on allegations of commercial spying and bribery during 2009 price talks.

The four included an Australian, Stern Hu. They were charged in August with paying bribes to obtain confidential information about China's steel industry and remain in detention.

Chinese steelmakers, which account for about half of all BHP Billiton's iron ore sales, last year refused to sign up to the benchmark rate, demanding a better deal. They were ultimately unsuccessful.

Industrial analysts expect iron ore prices to rise 10 to 20 percent in 2010 on increasing demand as the world economy recovers.

Ahead of this year's price talks, Brazil's Vale SA, the world's biggest iron ore supplier, has signed independent ore contracts with Chinese steel mills for fixed freight charges, Chinese state-run media reported last month.

Western Australia state Premier Colin Barnett has said he wants the iron ore contract pricing system dismantled.

Gavin Wendt, resources analyst with the research company Mine Life Pty. Ltd., said the move away from selling iron ore at benchmark rates played into BHP Billiton's strategy.

"BHP in particular has been trying to move away from benchmark pricing," Wendt said. "There is a place for benchmark pricing, but it is going to be a smaller proportion of seaborne iron ore trade."

BHP Billiton's iron ore production jumped 11 percent to 35.77 million U.S. tons (32.45 million metric ton) for the December quarter compared to a year earlier.

That took production for the half year to 68.96 million U.S. tons (62.56 million metric tons), a record figure that was up 6 percent on the previous corresponding six months.

Chinese iron ore imports rose 41.6 percent to 630 million U.S. tons in 2009, Beijing's customs agency reported this month.

Economists say the buying binge has been driven in part by a Chinese effort to build up stockpiles while global prices are low.‹

[DewDiligence]

Good news for iron and met-coal miners, although much
of the upside is already priced in (IMO):

http://online.wsj.com/article/SB10001424052748704479404575087063295944410.html

›Steelmakers Eye Big Increase in Raw-Material Costs

FEBRUARY 25, 2010, 7:02 A.M. ET
By ALEX MACDONALD

LONDON—Steel consumers should brace themselves for the onset of much higher steel prices in coming months as steelmakers conclude annual negotiations with miners that may result in steelmaking raw material prices rising by 70% or more in 2010, a large steelmaker said.

"In the final negotiations...the increase that we are faced with is bringing the benchmark price close to the [current] spot price," for both coking coal and iron ore, the person at a large steelmaker said.

He said steelmakers will likely have to accept iron ore prices that are 70% to 80% higher than last year's benchmark prices and coking coal prices that are 80% to 100% higher than last year's benchmark prices.

"We definitely feel that our negotiation room to get to a much lower price...is not very likely. The iron ore sellers are shifting more volume to spot market. They tell us they don't want to go for an annual contract. The longest period they want to give is [around] a quarter," he said.

Paul O'Malley, chief executive at Australia's largest steelmaker, BlueScope Steel Ltd., said he expects iron ore contract prices could jump 60% or more in this year's round of negotiations.

Industry analysts at the high end of market consensus were eyeing 40% and 55% price increases for iron ore and coking coal, respectively, according to a Dow Jones Newswires survey of 19 analysts carried out in January.

Gordon Moffat, Secretary General for Eurofer, the European steel body that represents steelmakers such as the world's largest steelmaker ArcelorMittal, ThyssenKrupp AG, and Corus, the European arm of India-based Tata Steel Ltd., said a potential near doubling in raw material prices is "something that is definitely on the table. It's a possibility."

"Customers have not yet realized the impact that this will have on them," Mr. Moffat said. "We need to make it clear that it will have a huge impact on our cost level and that it will have a huge impact on steel prices." Mr. Moffat added.

He said that a 40% price rise in raw materials now appeared to be a conservative figure for the steel industry.

Steelmakers will have to pass on the higher raw materials costs to their customers in order to maintain healthy operating margins at a time when many steelmakers are still struggling to recover from last year's economic downturn, which caused key steel customers in the automotive, appliance and construction industries to pare back orders. Steel demand is beginning to recover, largely driven by the emerging markets, but steelmakers are still mired by excess production capacity and weak demand particularly in developed markets such as the U.S. and Europe.

Steel prices may have to rise by a minimum $160 a ton for hot-rolled coil from April 1 to cover the higher costs, the person said. In Europe, prices for hot rolled coil could rise to EUR550 a metric ton from EUR400 a metric ton in the fourth quarter of 2009 in order to cover costs.

The price rise "is not demand driven, it is cost driven," he said.

The world's largest steelmakers in Asia and Europe are currently locked in annual price negotiations with the world's largest iron-ore miners—Brazil's Vale SA, and Anglo-Australian miners Rio Tinto PLC and BHP Billiton Ltd.—in order to determine prices for iron ore and coking coal that would take effect for from the start of the fiscal year beginning April 1, 2010.

The negotiations usually set raw material prices for the rest of the steel industry although for the first time last year, Chinese steelmakers and the miners were unable to settle upon an annual benchmark price. The two parties agreed on a provisional price based on a 33% cut in benchmark prices with Japanese steelmakers.

Iron ore miners such as BHP and Vale have indicated to steelmakers that they expect prices to rise sharply due to burgeoning demand from emerging markets such as China, the world's largest steel consumer, and the fact that large iron ore miners are operating near 100% of their available capacity. They have also indicated that they want to move away from an annual price benchmarking system to shorter-price contracts based on spot prices.

BHP declined to comment on the price rise but confirmed previous comments that it was in favor of a shorter-term pricing system that took into account spot prices. Rio Tinto and Vale weren't available to comment on price rises, although Vale's head of ferrous metals, Tito Martins, previously said he expects customers who want a benchmark price to pay close to the spot market price.

Spot prices for iron ore fines of 62% ferrous content delivered into China have more than doubled to $131.20 a dry metric ton compared to $59.10 a dry metric ton in March 2009, according to The Steel Index. The price includes freight and insurance costs. Excluding freight and insurance costs, the price would be tantamount to about $110/ton, 83% higher than benchmark iron ore price of about $60/ton in 2009.

Meanwhile, spot prices for coking coal are hovering at $200-$250 a dry metric ton compared to the 2009 benchmark coking-coal price of about $129/ton, free on board, the person at the large steelmaker said.

The steep price rises are largely due to the fact that steel demand is expected to rise above pre-crisis levels to a record high in 2010, largely due to strong demand in emerging markets such as Brazil, India, and China, according to steel consultancy MEPS International Ltd.

Customers in developed countries such as the U.S. and Europe are also expected to place more steel orders, partly due to depleted inventories and slight pickup in end-user demand, but they are more likely to feel the pinch from rising steel prices because the U.S. and Europe are still facing a fragile economic recovery compared to emerging markets where growth is robust, the person said.

"The key message (is)...customers and the steel industry have to get used to this new reality," the person at the large steelmaker said.

Eurofer's Moffat also said the price rises are an indication that pricing power in the iron ore market is too concentrated in the hands of the top three miners. Vale, Rio Tinto and BHP accounted for nearly 70% of the 2008 iron ore trade that was shipped overseas.

Moffat called upon the European Commission's antitrust authorities and other relevant competition authorities to take note of the steep price rises as another reason to oppose the proposed production joint venture between BHP and Rio Tinto. Both miners want to merge their mining operations in the Pilbara region of Western Australia, but said they would continue to run their marketing operations independently of each other and the joint venture. Moffat urged regulators to oppose the joint venture on the grounds that it will concentrate the top three miners' pricing power even further.

Raw material prices are already forecast to remain high beyond 2010 since miners have shelved many of their expansion projects during the recession and are only now beginning to restart their expansion programs. A production joint venture will likely entail joint coordination of investment and expansion activities which could adversely affect capacity growth in the iron ore market, Moffat said. It would also give both companies the same cost base from which to negotiate future iron ore sales.

BHP and Rio said the joint venture would enable BHP and Rio Tinto to deliver more ore to the market faster and at lower cost by unlocking the synergies between their two businesses. The companies expect to generate $10 billion in savings by combining operations.‹

[DewDiligence]

VALE Ups Price of Iron Ore by ~35%

[The new quarterly pricing scheme used by the big-3 iron miners (VALE, BHP, RTP) is turning out much better for them than the old annual-benchmark system would have; despite some recent backtracking, the spot price of iron ore has mostly risen in tandem with the global economic recovery and remains sharply above 2009 levels. VALE’s version of the industry’s new pricing scheme bases the contract price for the new calendar quarter on the spot price one month before the end of the old quarter. (E.g. the contract price for Jul-Sep is based on the spot price May 31.) The above formula applies whenever the spot price falls on the target date falls outside a band of ±5% from the contact price of the previous quarter.

Please see #msg-43960884, #msg-45843807, and #msg-48499487 for related stories.]

http://finance.yahoo.com/news/Brazils-Vale-to-raise-iron-rb-1644389028.html?x=0&.v=2

›Sunday May 30, 2010, 11:41 am EDT

RIO DE JANEIRO (Reuters) - Brazilian mining company Vale will raise iron ore prices about 35 percent to as much as $145 per metric ton in July as part of a switch to quarterly pricing, a Brazilian newspaper reported on Sunday,

Markets widely expect iron miners to boost prices to bring them in line with spot ore prices following a shift away from a decades-old benchmark system, although analysts were still unsure exactly how the new pricing mechanism works.

O Estado de São Paulo newspaper did not say where it obtained details about the percentage of the price increase by Vale (NYSE:VALE; Sao Paolo:VALE5.SA), the world's largest iron ore miner. [This paper has credible sources, so one can assume the report is accurate.] But it cited Vale Ferrous Metals Director Jose Carlos Martins confirming the company would raise prices for steelmakers.

"In the second quarter, our prices were well below the spot market price in China," Martins told the paper.

"Under the current formula, our expectation is to recover a large part of that difference in the next quarter, which starts in July," he said, apparently referring to a system of indexes that adjust prices based on the spot market.

The world's top three iron ore miners -- Vale and Anglo-Australians BHP Billiton (BHP) and Rio Tinto (RTP) this year dumped the benchmark in favor of quarterly pricing, but the exact nature of how they calculate the price has not been fully disclosed. [Actually, VALE disclosed enough details on its most recent CC that investors can come very close using publicly available data.]

The exact amount of the price increase will be determined on Tuesday [because it’s based on the spot price at the end of May], the newspaper said.

A Vale spokeswoman said the company would not comment on the information.

Interfax this month reported Vale was asking Chinese steel mills to pay an iron ore price of $160 per metric tone in the third quarter -- 23 percent more than in the second quarter -- citing an unnamed source at Wuhan Iron & Steel.

Vale has said it was open to negotiating different indexes or a basket of indexes and different averages, but it did not disclose which index it mostly settled its prices based on.

Some analysts said the company was using the Platts Iron Ore Index, which is cleared by the InterContinental Exchange (ICE). Currently, there are three index providers: Platts, The Steel Index and Metal Bulletin Iron Ore Index.

Spot iron prices have fallen some 20 percent to $145 per metric tone since late April highs near $185 as buyers fret about the resilience of China's economy and the strength of steel demand in the second half of the year. [However, as noted in the prologue of this post, the Jul-Sep contract price is based on the spot price at the end of May.]‹