BHP Billiton and Rio Tinto, plus the likes of Fortescue and other iron ore exporters, are in for big profit gains this year.
The 40 year annual pricing contract talks between iron ore and coking coal producers and their buying steel mills in Japan and South Korea, are over.
BHP yesterday revealed short-term contracts, with price rises based on spot prices, and covering around half its annual exports.
And it’s just not the actual; pricing that will change, its the way the price is worked out: for the first time BHP will sell much of its iron ore exports on a ‘landed basis’.
That will make the ore from Brazil more expensive.
Under the new BHP way Asian steel makers will have the choice of buying Pilbara iron ore or paying an extra $US14 ($A15.30) a tonne in freight charges to ore from Brazil’s Vale.
It means the BHP ore will always be cheaper than the Brazilian ore.
No wonder Vale of Brazil, the world’s biggest exporter, revealed it had settled a short term deal with big Japanese mills.
And in reaching these agreements, both iron ore giants ended the annual contract arrangements.
Rival Rio Tinto still has to confirm the results of its negotiations, but it has been selling more and more iron ore on the spot market and pushing for a similar short term arrangement.
The short term nature of the contracts will mean price rises now, but there are forecasts that prices will ease later in the year when demand from China and other Asian buyers slows as the strong recovery eases.
Vale won a price rise of 90%, which takes the ore price to a new high, surpassing the level in 2008-09.
Sumitomo Metal Industries, Japan’s third-ranked steel group, confirmed that it had reached agreement with Vale for a short term three month contract, with the price rising 90% to around $US105 a tonne, from the previous benchmark of $US60 to $US62 a tonne for the year ending today, March 31.
BHP issued a short statement saying that it had reached agreement with buyers in Asia, and that was about all it was willing to say.
"BHP Billiton today announced that it had reached agreement with a significant number of customers throughout Asia to move existing iron ore contracts that were previously priced annually onto a shorter term landed price equivalent basis.
"The agreements reached represent the majority of BHP Billiton’s iron ore sales volume.
"The structural change that these settlements represent is consistent with BHP Billiton achieving market clearing prices," BHP said.
Analysts said BHP’s new price for the contract starting April 1 would be higher than Vale’s price and closer to the spot price which is above $US140 a tonne, before freight.
BHP shares closed up $1.03, or 2.3%, at $44.10, as investors reacted positively to the news of the BHP deal and the Vale contract and reported price increase.
Rio shares added 86c, or just over 1%, to $79.25 at the close.
It’s not known from the BHP statement if the settlement includes Chinese steel mills which have voiced opposition to big price rises.
The announcement follows a similar agreement BHP Billiton reached earlier this month with its coking coal customers in Europe, India, Japan, Korea and Taiwan.
That was at a reported $US200 a tonne for the June quarter of this year.
A report in the Nikkei newspaper in Tokyo said the new price would be $US105 per tonne for Japan’s Nippon Steel and South Korea’s Posco.
Of interest now will be if Fortescue Metals, which depends on the Chinese market, can reprice its iron ore and change the contract basis for pricing without upsetting its customers.
Fortescue sells little ore to Japanese and other Asian buyers..
Spot iron ore prices have doubled since last September as Indian exports have slowed because of an export tax being imposed and tightness in the Australian and Brazilian spot markets because of capacity constraints and rising demand from non-Chinese buyers in Asia.
In fact the price is now around $US140 a tonne excluding freight, while the spot price for hard coking coal is around $US240 a tonne because of the force majeure declared by BHP and Mitsubishi for exports from their mines in Central Queensland.
The recent cyclone and heavy rain has disrupted mining, rail and port operations.
Macarthur Coal yesterday lifted its force majeure declaration after coal shipments resumed on railroad tracks in Queensland and from the Dalrymple Bay export facility on the Central Queensland coast.
