By James Regan
SYDNEY (Reuters) - Rio Tinto (RIO.AX)(RIO.L) said it had moved to quarterly pricing of iron ore contracts, effectively killing off the decades old annual price-fixing system, despite opposition from buyers around the globe.
The miner is the last of the world's top three iron ore producers, who control two thirds of the total seaborne iron ore trade, to dump the benchmark pricing. The move leaves few options open for steelmakers, the biggest consumers of the metal, to mitigate the impact.
"Rio Tinto's position reflects the recent structural shift in the iron ore market away from benchmark pricing," Rio Tinto's iron ore chief Sam Walsh said in a statement on Friday.
The new pricing regime started on April 1, with reports BHP Billiton (BHP.AX)(BLT.L) was already getting more than $130 a tonne for its ore under April-June contracts based on the January-March average spot price -- more than twice last year's fixed price.
The threat of a shift had pitted miners, seeking to cash in on higher spot market prices, against steel mill customers from Beijing to Brussels demanding guaranteed prices for 12 months.
"We view with some concern the move away from the benchmark system," said Nicholas Walters, a spokesman for the World Steel Association, whose members account for 85 percent of global steel output.
Steelmakers will likely try to pass on some of the increase to consumers, with higher prices eventually reaching all the way down to the High Street, and they may also consider hedging or even acquiring smaller iron ore producers, he said.
BIZARE TIMING
European steelmakers can survive a jump in iron ore prices for now as their customers are keen to restock, but the pain of soaring costs could hit in the third quarter.
"The steelmaking industry finds the timing of this bizarre to say the least," said Walters. "We are just coming out of one of the worst recessions we've had ... and things are still fragile."
"It seems astonishing at a time when the recovery is very fragile to impose even more increases, leading to even greater profits for the mining industry and hardship for everybody else."
Brazil's Vale (VALE5.SA) and BHP have made it clear they were moving away from annual benchmarking as spot prices soared above last year's annual fixed price.
"What Rio has simply done today is sign the death warrant for annual benchmarks," said James Wilson, a mining analyst for DJ Carmichael & Co.
China, the world's largest buyer of imported iron ore from Brazil and Australia, was expressing support for the old benchmark system as recently as Thursday night.
Xu Xu, chairman of the China Chamber of Commerce of Metals, Minerals and Chemicals Importers and Exporters (CCCMC) said that only the benchmark system could guarantee stability and security for both buyers and sellers.
Sources familiar with the price negotiations so far doubted the quarterly pricing deals struck by Rio and the others included Chinese steel mills.
The Chinese mills under the umbrella negotiating bodies remain very opposed to this switch, one source said.
The CCCMC participates in pricing negotiations with foreign miners alongside the China Iron and Steel Association.
Miners have pushed for several years to move away from an annual benchmark system. The explosion of China's steel sector, growth of the spot market and a spate of Chinese defaults on contracted ore two years ago only increased their resolve.
Negotiations with mills already signed up to pay quarterly -- most likely in Japan, South Korea and Taiwan -- over how much iron ore each will be allotted under the new pricing system were not yet concluded.
Rio Tinto declined to provide further guidance on its dealings with customers, saying discussions were ongoing.
Austrian steelmaker Voestalpine (VOES.VI) said it was negotiating iron ore prices both on a quarterly and an annual basis with its suppliers.
BHP Billiton has already secured a 99.7 percent hike in the quarter, according to Macquarie Bank, although a $120.08 a tonne settlement for Pilbara fines iron ore is still a 22 percent discount to current spot levels.
Rio is forecasting China's iron ore demand to double to 900 million tonnes per year by 2020.
Reuters UK
