No deal yet on ore for BHP

June 30, 2008

June 30th (Herald Sun) – BHP Billiton remains locked in talks over iron ore contract prices with Chinese steel mills, as the June 30 deadline for annual negotiations ticks over.

But while the talks have dragged past the official finishing date, BHP is expected to reach a deal in line with Rio Tinto’s 85 per cent price rise secured with Chinese steel-making giant Baosteel last week.

“We have not concluded the negotiations but the contract structure is very similar to the structure that Rio Tinto currently has,” Marcus Randolph, chief executive of BHP’s ferrous metal and coal business, said in a media briefing last week.

“You’d have to say it would be unlikely that existing contracts would be substantially changed in the way that they are structured.”

Mr Randolph said the current round of negotiations would only apply to BHP’s existing contracts under the benchmark pricing system.

From now on, BHP will seek a new style of long-term contract where prices are linked to the more lucrative spot market, he said.

In contrast, Rio has focused on securing a freight premium accounting for the cheaper cost of shipping iron ore from Australia to China compared with the world’s other big supplier, Brazil.

BHP, however, has criticised the $US7.43 a tonne freight premium secured by Rio in this year’s talks as falling far short of the current $US55 to $US60 price gap.

Even so, Rio’s 85 per cent price rise compares favourably with the 65 per cent gain agreed to by Brazil-based iron ore giant Vale with Baosteel earlier this year.

Once BHP has reached agreement with Chinese customers, this year’s iron ore contract prices will be back-dated to April 1.

China has driven six consecutive years of growth in global iron ore demand, thanks to rising steel production fuelled by the rapid urbanisation of its 1.3 billion citizens.

Iron ore is now Australia’s second-biggest commodity export behind coking coal, the price of which tripled earlier this year also buoyed by continued strong demand from China.

BHP shares rose 81 to $43.70. Rio shares gained $3.46 to $135.50.

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