While BHP Billiton has a problem with possible corruption (see next report), it has made an interesting call in its third quarter production report.
While revealing a modest rise in third quarter iron ore production, the company took the opportunity to rule out any going back on its pricing and tonnage agreements with buyers.
It said it has now reached agreement with the majority of its steelmaking customers to permanently move existing contracts to index based prices on a landed equivalent basis.
That’s a strong statement from BHP to sectors of the Chinese steel industry in particular, that their hopes (demands even), for a return to the days of annual price and tonnage agreements was gone forever.
So the 40 year-old annual benchmark system of pricing iron ore (and coal) is dead.
It helped the industry start and grow, but it is now too big and the spot market globally, too large for annual pricing and tonnage arrangements.
Iron ore is now another commodity, like oil or copper.
The driver has been the surge in iron ore (and to a lesser extent, coking coal prices).
The 2009-10 benchmark price of about $US60 a tonne for iron ore was overtaken last year by the surging spot price, which has risen above $US160 a tonne.
Coking coal prices (for hi grade hard coals) have jumped from the contracted $US125 level for 2009-10 to around $US200.
Part of the reason for that surge has been the continuing fall in Chinese production and the production and shipping problems in central Queensland caused by the heavy rains and a cyclone in February and March.
In its March quarter production report BHP revealed a sharp rise in output from a year ago, and a more mixed one from December.
Rail and operational problems trimmed output from December’s strong levels.
BHP revealed an 11% rise in third-quarter iron ore production, but a 19% fall in copper output which was partly due to disruptions at its Olympic Dam mine.
Iron ore output was 31.16 million tonnes in the March quarter, compared with 28.19 million tonnes a year earlier.
Production from Olympic Dam, the world’s fourth largest copper deposit, won’t be back to normal until June at the earliest as the damage to the main shift is still being repaired.
Coking coal production rose 7% from the March quarter of 2009, but was down 8% from the December quarter because of the shopping problems and rain forced the company to declare force majeure on shipments from the Hay Point terminal in Queensland after storm damage.
Production of oil rose 16% to 36.84 million barrels of oil equivalent in the March quarter from a year ago, the company said.
Production of lead, zinc, nickel and silver all were higher in the quarter.
Uranium production from Olympic Dam dropped 90% from the March 2009 quarter because of the damage to the main shaft which also cut copper output.
BHP shares eased 7c yesterday to $42.73.
