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BHP seals some iron ore deals

Source: Reuters - Thu 30th Jul 2009

BHP Billiton has agreed with more customers to match the benchmark 33 price cut in iron ore prices, including some in China, but has yet to settle on either pricing or contract terms for nearly half its sales.

The world's third-largest iron ore miner, in an update on iron ore pricing on Wednesday, said that 47 percent of its volume had yet to be priced for the current fiscal year, running from April to March, leaving major question marks over the miner's biggest income earner.

But in an apparent victory for BHP, the miner also said it had persuaded customers to price almost a third of its annual sales volume on a mixture of quarterly, spot and index pricing, marking a big departure from more traditional contract pricing and a likely increase from the current share.

"They have almost half of their volumes where negotiations are continuing and we're now at the end of July" said Rob Craigie, resources analyst at FW Holst, noting that BHP appeared to be making major progress towards more market-based pricing, including some quarterly settlements.

"That's clearly a new development in these iron ore price negotiations" he added.

In Europe, however, the world's biggest steelmaker ArcelorMittal , has once again, expressed its loyalty to the traditional benchmark contracts for its iron ore purchases.

"We're not buying anything on spot, we're buying all on contract price" said Lakshmi Mittal, chairman and chief executive of the company told a conference call after the company's second quarter results.

BHP said it had agreed to take a 33-44 percent price cut for iron ore supplies covering almost a quarter of its annual sales volumes more than a month after sources said it had agreed in-principle with major customers outside China. 

But that's an outcome that China's steel makers have been rejecting as too little to keep many of them in business.

The miner declined to say if any Chinese customers were party to the deal, but industry sources in China have confirmed that some major Chinese steel-makers had done so, even as the China Iron and Steel Association, which has led this year's negotiations, holds out for a bigger cut.

"A further 30 percent of BHP Billiton's total iron ore volumes will be sold on a mix of quarterly negotiated pricing, market clearing price (spot market) and index-based pricing" it said.

"The company believes that current settlements are indicative of continued progress towards transparent market pricing."

The remaining 47 percent of BHP's volumes for the current fiscal year is still being negotiated. This is being sold at the spot rate or provisionally at the 33-44 percent discount agreed mainly by Japanese and South Korean steel-makers.

Craigie of FW Holst said BHP's shift towards more market-based pricing should give BHP an advantage over Brazil's Vale , the world's biggest iron ore producer, because benchmark pricing had eroded BHP's freight advantage.

BHP and number-two producer Rio Tinto both ship from Australia and therefore enjoy a natural freight advantage over Vale, which ships from Brazil, but the Australian producers have long complained they do not benefit fully from it.

"Spot or index-based pricing benefits the Australian producers relative to Vale" Craigie added.

Market-based pricing stands in contrast to the benchmark system where prices are usually negotiated annually based on the first deal struck between a major miner, usually Australian, and a major steelmill, usually Japanese, Chinese or South Korean. 

Chinese steel industry heads, gathering in Beijing for the China Iron and Steel Association's annual meeting, declined to comment on the status of price talks with BHP or Rio Tinto.

"We're still buying from our normal sellers" Hebei Iron and Steel chairman Wang Yifang told Reuters.

Shan Shanghua, association secretary-general, said he was "unable to reply" to reporters' queries.

Most top Chinese mills have signed interim deals with the miners to tide themselves over the stalemate in annual price negotiations, industry sources told Reuters this month.

BHP Billiton shares pared losses after the news, closing down 1.6 percent at A$37.43 (18.74 pounds).

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