News Room - Steel Industry

Posted on 12 Apr 2010

Rio Tinto joins BHP and Vale to end annual ore pricing

Rio Tinto has followed rival mining firms and says it is negotiating new iron ore supply contracts priced for three months rather than a year.

 

The move ends years of tradition and is seen as a demonstration of the power the miners have over their customers.

 

Demand is at record levels, especially from China, whose appetite for ore and other commodities continues to grow.

 

Last month, BHP Billiton and Vale agreed quarterly contracts with some Asian steel mills.

 

Japan and South Korea seem to have accepted the change, but China's position is less certain.

 

China has been strongly opposed to a move to shorter-term pricing, which exposes it to price rises over the year.

 

However, Brian Redican, chief economist at Macquarie bank in Australia, said: "The shortage of iron ore means if the Chinese won't sign up to fixed prices at the quarterly rate they will be forced to buy it on the open market where prices are about 15%-20% higher.

 

"It would be cutting off its nose to spite its face."

 

The old yearly pricing system caused huge friction. When the spot - open market - price fell significantly below the annual price, customers complained, and when it rose above the set price, it was the miners that were unhappy.

 

The most recently struck contracts are, on average, priced 100% higher than last year's prices.

 

Last month, four Rio Tinto executives were jailed after being found guilty of bribery and stealing secrets by a Chinese court.

 

One of the four - Australian national Stern Hu - had been Rio Tinto's lead negotiator in talks with Chinese steel mills to try to settle a price for China to buy iron ore from Australian mining companies.