BHP Billiton Ltd., the world's largest mining company, wants to introduce an iron ore price index, increasing pressure on Asian steel mills to pay more under annual contracts with demand set to outstrip supply through 2015.
"This is something that we are looking at based on our Western Australian iron ore products," Emma Meade, a spokeswoman for Melbourne-based BHP said today in an e-mailed statement. ``It is clearly not relevant to this year's negotiations.''
BHP's index would be used to help set annual rates and be based on cash prices, which surged last month to more than triple the 2007 benchmark because of demand from China. Mills such as Baosteel Group Corp. are set to start contract talks next month with suppliers BHP, Rio Tinto Group and Cia. Vale do Rio Doce.
"It would shift the power in the market much more towards suppliers," Gerard Burg, a minerals and energy economist at National Australia Bank Ltd. in Melbourne, said today. "I wouldn't expect them (Asian mills) to be too receptive."
BHP, the world's third-largest iron ore producer, fell 78 cents, or 1.7 percent, to A$46.10 at the 4:10 p.m. Sydney time close on the Australian Stock Exchange. Shares of Rio, the world's second-largest producer, fell 1.7 percent to A$110. Gervase Greene, a Perth-based spokesman for Rio's iron ore unit declined to comment on the proposal.
Iron ore benchmark prices are set for the 12 months starting April 1 after talks between major suppliers and mills. Spot iron ore prices, which are determined on a single-cargo basis, had reached $185 a ton, according to Credit Suisse Group on Sept. 28. That compares with the 2007 benchmark Australian price for long- term contracts of $51.47 a ton. About 90 percent of BHP's sales are under contracts, according to Credit Suisse.
Both Sides
"The current iron ore pricing mechanism is supported by European, Japanese and Chinese steelmakers and the miners," Chen Xianwen, deputy director of market research at the China Iron & Steel Association, said today during a conference in Dalian, northeast China. "The established mechanism should be protected, though we welcome any suggestions that would benefit both sides."
Baosteel may have to accept a bigger increase in benchmark iron ore prices than the 9.5 percent gain it negotiated at the end of 2006, the smallest advance in four years. Iron ore demand from China, which produces a third of the world's steel, has sent contract prices up threefold in the past five years.
"It is a demand-driven market, it is not a price-driven market, so this is why you will see the creation of a spot index," Mark Pervan, a commodity strategist at Australia & New Zealand Banking Group Ltd. in Melbourne, said today by phone.
Rising Imports
Iron ore imports to China, the world's largest buyer of the material, will rise 11 percent next year to an estimated 410 million metric tons, Luo Bingsheng, vice chairman of the China Iron & Steel Association, said today in Beijing.
The market may be under-supplied until 2015, Merrill Lynch & Co. analysts led by Vicky Binns said in a report on Oct. 29, citing BHP's Toth in an analysts' briefing during visits to the company's operations in Western Australia. This compared with Merrill's forecast for 2012 and analysts' consensus for 2009.
"The current system has brought good stability for 12 months where you know what you are going to get," said Peter Chilton, who helps manage the equivalent of $1.4 billion at Constellation Capital Management in Sydney. "The new system might bring more volatility. Bearing in mind it is a very capital intensive business, I'm not sure that is necessarily the right thing."
Double Output
BHP will spend more than $15 billion to almost double its iron ore output from Australia to 300 million tons annually by 2015, Ben Williams, vice president of sales and marketing at the carbon steel materials unit, said yesterday in Dalian.
A new index would be similar to the globalCOAL index where parties trade directly with each other, Peter Toth, BHP's marketing director for carbon steel materials, said in a slides presentation lodged on the company's Web site.
"A good index could help buyers and sellers to have a common view of the market clearing price and could help to facilitate a faster, less stressful and less confrontational process to agree an annual price," BHP's Meade said. "This would work well in both a strong and weak market."
Iron ore contract prices may rise 30 percent, according to the median forecast of eight analysts surveyed by Bloomberg last month. Baosteel, China's largest steelmaker, said Oct. 19 supplies are lagging behind demand.
"With the current situation where the bulk of iron ore is traded under the annual negotiations, consumers of iron ore have a degree of market power from the ability to negotiate together," National Australia's Burg said. "This would really reduce the size of each individual transaction, it would be individual steel mills negotiating with individual suppliers. In that context an individual steel mill would have a lot less market power."
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