BHP remains defiant over Chinese iron ore increase
By Javier Blas and Rebecca Bream in London and Anna Fifield in Seoul
Friday, June 27, 2008
The record increase agreed by Chinese steelmakers for iron ore from Australia's Rio Tinto on Monday brings the conclusion to this year's annual negotiations a step closer.
But it is still unclear whether the other big Australian iron ore producer, BHP Billiton, will agree similar terms, even though pure economics would suggest that it should. After all, the increase of up to 96.5 per cent dwarfs last year's 9.5 per cent rise.
BHP Billiton said yesterday the increase was not enough and pressed ahead with a radical plan to rewrite the way millions of tonnes of iron ore are sold each year, setting the stage for longer negotiations with its customers.
Steelmakers do not want to pay a cent above Rio's settlement.
They are also strongly resisting BHP Billiton's plan to scrap the annual contracts system, which started in the 1960s.
Posco, the South Korean steel giant, said yesterday an agreement with Rio Tinto, also likely to be for an increase of about 96.5 per cent, was due this week.
Negotiations with BHP Billiton, however, were proving thornier. “There are still big differences between what we want and what they are requesting,” it said.
The reluctance of BHP Billiton, which is in the middle of a hostile takeover battle for Rio, to settle terms stems from the company's belief that its customers should pay much more for Australian than Brazilian ore because Australia's proximity to China reduces shipping costs.
BHP Billiton believes that Rio's agreed price rise of 80 to 96.5 per cent still does not close the shipping gap, despite being higher than the 65-71 per cent obtained by Vale of Brazil.
Marius Kloppers, BHP Billiton chief executive, said that its rival's price increase was only 10 per cent of the freight differential between Australia and Brazil.
Rob Clifford, of Deutsche Bank, said that, based on Rio's agreement, Australian ore trades at a $39 a tonne discount to the Brazilian ore at current spot freight rates. It would have been $47 a tonne if Rio had settled at Vale's level, he said.
“We believe that this change opens the door for further differences in negotiated prices to occur in future years to continue to close the gap,” Mr Clifford said.
More fundamentally, BHP Billiton wants to end the annual contract system.
Rio Tinto, however, although it is keen to obtain a shipping premium, is working to protect the essence of the system: annual negotiations over price between global miners and steelmakers.
Mr Kloppers wants to scrap those negotiations, moving iron ore sales to a hybrid system – between the spot market and the traditional annual contracts – with automatic price revisions depending on the tightness of the market.
He said yesterday that BHP Billiton would “not sign any new [traditional annual] contracts.”
Mr Kloppers added: “As they expire, which will take some years, we will sign new contracts on new transparent terms.”
