BHP says using OTC iron ore mkt, old system dying

June 23, 2008

June 23rd (Reuters) – Mining group BHP Billiton (BLT.L: Quote, Profile, Research) (BHP.AX: Quote, Profile, Research) has started using the new over-the-counter market for spot iron ore as the traditional benchmark system loses clout, Chief Executive Marius Kloppers said on Monday.

Kloppers also told reporters following a speech in London that a new iron ore price settlement between rival Rio Tinto (RIO.L: Quote, Profile, Research) and China’s Baosteel (600019.SS: Quote, Profile, Research) [ID:nSHA250087] was positive but represented a small step in a needed adjustment for a disparity in freight rates from Brazil and Australia.

 

BHP supports the new OTC market after Credit Suisse and Deutsche Bank announced last week they would offer cash-settled swaps in iron ore across a range of maturities. [ID:nL23582773]

 

“We’ve said right from the start that we would be a participant and we’ll continue to be a participant. We see that as a very important development,” Kloppers said.

 

While annual talks between miners and steelmakers over benchmark contract prices still get heavy focus from the iron ore sector, that benchmark system is already on its way out, Kloppers said.

 

“Most iron ore is not traded on the benchmark system anymore… so that just means to me that only with great difficulty can I see longevity in the traditional system.”

 

About half of Chinese iron ore consumption is met within the country and falls outside the benchmark system while all of Indian iron ore is sold on a market-clearing basis, he said.

 

BHP has long been calling for a more transparent system of pricing to replace the traditional yearly price negotiations for iron ore with steelmakers.

FREIGHT DIFFERENTIALS

 

The largest iron ore producer, Brazil’s Vale (VALE5.SA: Quote, Profile, Research) (RIO.N: Quote, Profile, Research), agreed annual price hikes with steelmakers of 65-71 percent in February, but Australian rivals BHP and Rio (RIO.AX: Quote, Profile, Research) have been pressing for higher settlements from Asia customers.

 

They have been arguing that they should get better prices since Asian steelmakers have to pay much lower freight costs from Australia versus Brazil.

 

Rio announced on Monday that Baosteel had agreed to pay 79.88 percent to 96.5 percent more for iron ore under its long term contract.

 

Kloppers declined to say if BHP would agree to the same terms, but said this was a positive development.

 

“We’re talking about a quarter of the (estimated) long term freight differential that was captured, but at today’s rates it’s only about a 10th,” he said. “Clearly this is something we need to work at.”

 

The gap in freight rates between the two regions has skyrocketed in recent years as a commodities boom has led to sharply higher shipping costs. The Baltic Dry Cargo Index .BADI has jumped 1,100 percent over the past six years.

 

BHP in February made a formal takeover bid for Rio Tinto to forge a mega-mining group with a market capitalisation of nearly $400 billion.

 

Rio has repeatedly spurned BHP’s all-share takeover proposal, currently worth around $170 billion, saying it fundamentally undervalued Rio and its growth prospects.

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