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MINING giant BHP Billiton has joined Rio Tinto in talking tough on seeking higher iron ore prices as China seeks to put pressure on the Australians to cave in by delaying some high-priced Australian spot sales into the country.
In a move reminiscent of previous iron ore talks, when the Chinese Government sometimes used heavy-handed tactics to pressure the miners, traders in China said Beijing had delayed issuing import permits for March, stranding at least three unloaded cargoes at Xingang port in Tianjin. The Chinese move might be a reaction to Rio's decision in January to start exercising contract clauses that enable it to divert up to 10 per cent of contracted volumes on to the spot market. But with iron ore in short supply and spot prices soaring, analysts doubt that the Chinese steel mills can afford to turn away Australian spot cargoes, and BHP chief commercial officer Alberto Calderon believes it will be only a temporary delay. "You may have a temporary thing now and then, but the market works pretty well," Mr Calderon said yesterday. But the Chinese move highlights the deterioration in relations between the Chinese and the Australians, who have dismissed as too low a massive 65-71 per cent increase in annual contract prices agreed to by Brazilian giant Vale. Most Australian ore is sold under long-term contracts, but with spot prices of nearly $US200 a tonnes compared with a new landed contract price of about $US120 a tonne, the Australian miners are moving to sell more ore on the spot market. Both Rio and BHP are also pushing aggressively for an added freight premium to recognise the cheaper cost of landed iron ore from Australia relative to more distant Brazil. Mr Calderon said the freight difference was worth as much as $US8 billion in additional annual revenue for the Australian iron ore miners. That would please the Government, which would gain additional royalties and tax revenue, but not the Chinese who have to pay for it. The Chinese steel mills are already worried at the prospect of BHP taking over Rio and increasing its market clout, but that clout is now already effectively being wielded. "We will be looking to get the highest price possible on this, and it has to be higher than what Vale got," Mr Calderon said, echoing Rio's stance. He indicated that the prospects of winning a freight premium had been improved now that both miners were arguing for it. In 2005, Rio did not support BHP's failed push for a freight premium. "We believe that we will get something now that Rio is on the same side," he said. But Rio and BHP are far from united as Rio seeks to fend off BHP's hostile takeover bid. And in what seemed a move to pacify BHP's Chinese customer base and reassure Beijing over its intentions, Mr Calderon criticised Rio's tough stance on diverting contract ore into spot markets as breaking the "spirit" of the contracts. He said BHP would fulfil 100 per cent of its contracted deliveries, although in the future BHP planned to move more ore on to spot and index-based pricing. The price talks appear destined to spill over into the new contract year starting on April 1. But while any deal will be backdated, there is industry speculation that unless a deal is done by the end of June, Rio and BHP might be able to void some contacts and divert all that ore on to the spot market. "If that is true, then it is a very big stick the Australian producers have," Citigroup analyst Alan Heap told The Australian. During price negotiations in 2006, China at one stage tried to cap prices by barring imports of any ore priced above the previous contract price.
In a move reminiscent of previous iron ore talks, when the Chinese Government sometimes used heavy-handed tactics to pressure the miners, traders in China said Beijing had delayed issuing import permits for March, stranding at least three unloaded cargoes at Xingang port in Tianjin. The Chinese move might be a reaction to Rio's decision in January to start exercising contract clauses that enable it to divert up to 10 per cent of contracted volumes on to the spot market. But with iron ore in short supply and spot prices soaring, analysts doubt that the Chinese steel mills can afford to turn away Australian spot cargoes, and BHP chief commercial officer Alberto Calderon believes it will be only a temporary delay. "You may have a temporary thing now and then, but the market works pretty well," Mr Calderon said yesterday. But the Chinese move highlights the deterioration in relations between the Chinese and the Australians, who have dismissed as too low a massive 65-71 per cent increase in annual contract prices agreed to by Brazilian giant Vale. Most Australian ore is sold under long-term contracts, but with spot prices of nearly $US200 a tonnes compared with a new landed contract price of about $US120 a tonne, the Australian miners are moving to sell more ore on the spot market. Both Rio and BHP are also pushing aggressively for an added freight premium to recognise the cheaper cost of landed iron ore from Australia relative to more distant Brazil. Mr Calderon said the freight difference was worth as much as $US8 billion in additional annual revenue for the Australian iron ore miners. That would please the Government, which would gain additional royalties and tax revenue, but not the Chinese who have to pay for it. The Chinese steel mills are already worried at the prospect of BHP taking over Rio and increasing its market clout, but that clout is now already effectively being wielded. "We will be looking to get the highest price possible on this, and it has to be higher than what Vale got," Mr Calderon said, echoing Rio's stance. He indicated that the prospects of winning a freight premium had been improved now that both miners were arguing for it. In 2005, Rio did not support BHP's failed push for a freight premium. "We believe that we will get something now that Rio is on the same side," he said. But Rio and BHP are far from united as Rio seeks to fend off BHP's hostile takeover bid. And in what seemed a move to pacify BHP's Chinese customer base and reassure Beijing over its intentions, Mr Calderon criticised Rio's tough stance on diverting contract ore into spot markets as breaking the "spirit" of the contracts. He said BHP would fulfil 100 per cent of its contracted deliveries, although in the future BHP planned to move more ore on to spot and index-based pricing. The price talks appear destined to spill over into the new contract year starting on April 1. But while any deal will be backdated, there is industry speculation that unless a deal is done by the end of June, Rio and BHP might be able to void some contacts and divert all that ore on to the spot market. "If that is true, then it is a very big stick the Australian producers have," Citigroup analyst Alan Heap told The Australian. During price negotiations in 2006, China at one stage tried to cap prices by barring imports of any ore priced above the previous contract price.
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