Rio Tinto May Break With Other Producers on Iron Ore Price
NYTimes.com
Friday February 22, 2:38 am ET
By Tim Johnston
SYDNEY, Australia — Rio Tinto, the world’s second-largest iron ore producer, has indicated that it is not satisfied with the 65 percent increase in the benchmark ore price negotiated by Companhia Vale do Rio Doce, the Brazilian mining conglomerate, with Nippon Steel of Japan and Posco of South Korea.
Rio Tinto’s aggressive stance could put pressure on Chinese steel makers, which are major customers for Australian ore, and may signal the beginning of the end for the benchmark system of iron ore pricing.
Under that system, world iron ore prices have typically followed annual benchmarks set by one of the three major ore producers — Vale, Rio Tinto and BHP Billiton — in their negotiations with major consumers. Those three companies account for almost three-quarters of global iron ore output.
The Australian media have speculated that BHP Billiton also intends to try to secure a greater price increase. A spokeswoman for BHP, which has made a bid to take over Rio Tinto, declined to comment.
The deal reached this week by Vale, the world’s largest producer of iron ore, allows for a 65 percent increase in the price of Itabira ore and a 71 percent increase in the price of the premium Carajás ore. The contract takes effect April 1.
But Rio Tinto has said it is looking for greater flexibility, including the ability to factor in the relative advantages of freight distances.
“Rio Tinto will continue to negotiate to obtain a freight premium, to reflect its proximity to Asia and its major customers,” Sam Walsh, chief executive for the company’s iron ore group, said in a statement.
Rio Tinto’s argument is that the steel mills are paying significantly less for Australian ore when it is priced at the Chinese port, and it wants a share of some of that saved money.
“We believe that more recognition of our geographical proximity to major markets should be reflected in the price,” a spokesman for Rio Tinto Iron Ore, Gervase Greene, said Wednesday.
Freight is a significant factor in input prices, accounting for some 30 percent of the landed cost of Australian iron ore in China, and almost 50 percent of the cost of Brazilian iron ore.
At the moment, the benefit of that cost difference is accruing entirely to Asian steel producers.
Steel makers in China produce about half the world’s supply, and the country’s growing economy has fueled a rise in raw material prices. Even before the deal negotiated by Vale, iron ore prices had almost tripled in the last five years.
Most iron ore is sold under long-term contracts, but companies like Rio Tinto are now trying to sell more on the spot market to take advantage of the increasing premium for spot ore.
The benchmark price for iron ore is currently about $60 a ton. On the spot market, driven almost entirely by Chinese demand, prices are just under $200 a ton delivered.
Chinese steel producers are already coming under pressure from rising fuel prices and a slowing global economy. Analysts speculated before the announcement that they were looking for rises of around 30 percent.
There have been no public comments from Chinese mills since Vale’s announcement.
Last month, BHP signed a 10-year deal with Baosteel of China to supply 100 million tons of ore. The deal was not priced on the benchmark.
“It was a hybrid pricing model,” a BHP spokeswoman, Samantha Evans, said Wednesday. “Long-term contract prices have traditionally only referred to the benchmark. We are saying they need to have the flexibility to accommodate more market-driven approaches.” Ms. Evans declined to say whether BHP was pursuing similar deals with other customers.
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