BHP Billiton's new iron-ore pricing may collide with Chinese import curbs

News was prepared under the information support of Online Daily Newspaper on Hellenic and international Shipping "Hellenic Shipping News".

31 Jul 2009

Iron-ore pricing moves on Wednesday saw BHP Billiton remove 30% of its iron-ore from traditional benchmark pricing, accompanied by reports that China may issue far fewer iron-ore import permits in order to restore pricing balance. While Melbourne-headquartered BHP Billiton announced that 30% of its iron-ore volume would be sold on the spot market or through index-linked pricing, the ‘Steel Business Briefing' reported that Beijing would be issuing far fewer iron-ore import licences. "The smaller the number of import licences, the greater the control over the negotiating block," a South African iron-ore analyst pointed out to Mining Weekly Online. "It's very clear that the Chinese negotiating position has not been helped by the fact that the spot prices of iron-ore are now higher than the benchmark prices," the analyst said. While the Financial Times heralded BHP Billiton's announcement in London as a departure from a 40-year tradition of annual negotiation of iron-ore prices and BHP Billiton said that it marked a move towards pricing transparency, the ‘Steel Business Briefing' indicated that less than one-half of the 112 iron-ore import licences were likely to be issued by Beijing going forward, which may have the effect of swinging the balance of pricing power into China's favour.
Last month, Rio Tinto's workers were arrested in China, on allegations of bribery and espionage during iron-ore pricing negotiations. The arrests were made shortly after Rio Tinto backed out of an agreement that would have seen State-owned Chinese company Chinalco invest up to $19,5-billion in it. The investment would have resulted in Chinalco owning an 18% interest in Rio Tinto's Australian iron-ore reserves, which met with Australian Opposition party resistance.
This was followed BHP Billiton and Rio Tinto moving to combine their Australian iron-ore projects. Chinese-speaking Australian Prime Minister Kevin Rudd has been at pains for some time to emphasise that the developments in the Australia-China iron-ore ticktack are purely business in nature. But some view BHP Billiton's latest iron-ore sales announcement as prompting China to defend itself against industry consolidation as well as rising spot-market prices, through the reduction of the number of import permits that it issues, even though this could impact negatively on smaller steelmakers in China. Should China curb the issuing of import licences, South Africa's Kumba Iron Ore (KIO) might benefit as KIO is known to favour the current benchmark pricing system as sell as the long-term contracts that go with it - as the Chinese appear to do at present. An iron-ore spokesperson said in South Africa that it had to be borne in mind that 47% of BHP Billiton's iron-ore volumes were still undecided. He said that 30% of its iron-ore sales would be at the spot price or index-linked; 23% would be under benchmarking, which had to bear discounts ranging from 33% for fines to 44% for lump, but that thebiggest single percentage remained undecided. If iron-ore import permits were "drastically" reduced as the 'Steel Business Briefing' reported would be the case going forward, he expected most of the 47% to be forced into long-term contractual sales.
If that eventuated, he did not see the latest announcement as being any major departure from the practice of the last few months, in that most of the iron-ore volumes would be sold under long-term contracts at the discounted prices.
This contrasted with a videocast on the Financial Times website, where commodities correspondent Javier Blas said smiles on the faces of BHP Billiton executives indicated their pleasure at the latest pricing announcement and described the BHP Billiton move as a move away from 40 years of iron-ore pricing opacity.
The commentator suggested the beginning of the end of benchmark pricing and a move towards a freer iron-ore market, comparable with what had happened in the oil market in the 1970s. As if in anticipation of the BHP Billiton announcement, JP Morgan Chase on Tuesday raised BHP Billiton's and Rio Tinto's profit estimates by 40% because of rising iron ore prices. The investment bank, according to a Bloomberg News report, estimated that BHP Billiton's net income might be $8,3-billion in the year to June 30, 2010, up 37% from an earlier estimate of $6,1-billion, and that Rio Tinto's net income might be $6,7-billion next calendar year, up from an earlier estimate of $4,8-billion. But in South Africa, a spokesperson expected BHP Billiton's remaining 47% eventually to be sold on a long-term basis, which would not advance the pricing practice to any great extent.
The ‘Steel Business Briefing' report stated, however, that China intended reducing the number of iron-ore import licences "drastically", which some saw as suggesting that China wanted to retain iron-ore purchases on a long-term contractual basis.

Source: Mining Weekly