BHP Billiton CEO confident agreement will be reached on iron ore prices

June 11, 2008

June 11th (Forbes) –  BHP Billiton chief executive Marius Kloppers said on Wednesday he was confident that agreement could be reached on prices for iron ore sold under contract in the near future.

Speaking on Sky Television’s Business Channel, Kloppers said he expected the agreement to reflect market conditions, adding that there was logic in his group’s push for the price agreement to include a ‘freight premium’ to reflect the lower cost of shipping ore from BHP Billiton’s Pilbara mines in north Western Australia, than from Brazilian mines, the other key source of seaborne iron ore.

Negotiations this year for prices effective from April 1 have been more protracted than usual but are likely to be concluded by June 30. If no agreement is reached by then Chinese steelmakers may face paying much higher spot market prices for ore.

Kloppers comments came as reports suggest China’s smaller steelmakers have accepted a 95 percent rise in annual iron ore prices by Rio Tinto but bigger firms such as Baosteel are holding out for smaller increases.

Brazil’s Vale has already settled annual contracts with Asian buyers at levels around 70 percent above last year’s prices, but Rio Tinto and BHP Billiton have been holding out for larger increases to reflect the lower cost of shipping ore from Australia to China than from Brazil.

Kloppers said the his group maintained very good relations with its customers in China and other Asian markets, even though there had been some differences when it came to prices.

China’s steelmakers have also been concerned about BHP Billiton’s proposal to merge with Rio Tinto via a $167 billion hostile scrip offer.

They believe that the merger would place too much pricing power in the hands of too few suppliers as on the supply side, post merger, there would be only two major iron ore suppliers in the world, BHP Billiton and Vale.

But Kloppers said such a view was misplaced as customers as well as shareholders stood to benefit from the extra value that could be extracted by merging the two groups.

‘It can be value accretive to both sets of shareholders and there is substantial financial benefit to unlock not only for shareholders but also for customers,’ Kloppers said.

‘The industrial logic around this transaction has never been questioned which is the creation of synergies, the value that can be extracted by removing over edge, going quicker in volume, delivering more product to customers and these opportunities are unique to this combination.’

BHP Billiton is offering 3.4 of its shares for each Rio Tinto share.

Rio Tinto directors have refused to talk to BHP Billiton, labelling the offer from the world’s top miner as inadequate.

Kloppers said he would have preferred to engage with Rio Tinto over the merger proposal but his group’s bid was proceeding regardless.

‘Clearly it would have been better if we had early engagement but in the absence of any discussion we are continuing to progress our deal and continuing to cross off those various milestones,’ he said.

‘As far as duration is concerned, with or without Rio’s co-operation this transaction is always going to be lengthy and there is no real change in the timeframe as a result of the lack of engagement so far.’

The offer is currently before the European Union’s antitrust regulator as part of the regulatory process it needs to go through.

The commission has until July 4 to decide on the offer or begin a five-month period of considering the offer in more detail, known as the phase two process.

‘We have always worked on the premise that we will go to what is called a phase two review given the importance of this transaction and the size,’ Kloppers said.

‘That means we will only get outcome after the EU has run through all of its machinations and that will only occur towards the end of year.’

Meanwhile, The Sydney Morning Herald reported on Wednesday that China’s state-owned steelmakers are looking to buy a significant stake in BHP Billiton.

Citing an unnamed senior Chinese steel industry official, the newspaper said there were efforts to form a joint investment vehicle to buy shares in the world’s largest miner.

‘Large Chinese companies like Baosteel, Wugang and Angang hope they can come together to take a stake in BHP,’ said the official, who is connected with the China Iron & Steel Association.

The official said the proposed investment would probably be financed by the China Development Bank — the same state-owned policy bank that funded Chinalco’s raid on Rio Tinto’s London-listed shares last February.

The raid delivered Chinalco and its partner Alcoa a 9 percent stake in Rio Tinto, ranked the world’s third largest miner.

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