Iron Ore Contract Settlement Prices Down For BHP Billiton

BHP Billiton (BHP-N, BLT-L) has concluded iron ore price negotiations for the 2009 contract year with a number of its customers. Prices for iron ore fines are about 33% lower than contract prices agreed to in the 2008 contract year and about 44% lower year-on-year for iron ore lump.

“These prices seem to be in line with prices agreed between Rio Tinto and its buyers,” says Patricia Mohr, vice-president economics at Scotiabank in Toronto. “I think buyers believe that spot purchases will yield lower prices when the market is down, but this situation easily changes when market conditions improve.”

Mohr also notes that China’s iron ore imports have been at record levels recently alongside record domestic steel production, anticipating China’s huge infrastructure spending program.

BHP’s annual contract price settlement, announced July 29, covers about 23% of the company’s total iron ore volumes.

Another 30% will be sold on a mix of quarterly negotiated pricing, market clearing price or the spot market price, and index-based pricing. (BHP says negotiations for the remaining 47% of iron ore volumes are ongoing.)

Price negotiations for 2009 contract prices have been drawn out this year. The China Iron and Steel Association argues that Chinese steel mills should not have to pay different prices for iron ore (spot prices versus quarterly contract prices).

Investment bank Dahlman Rose & Co. called BHP’s agreement to sell 30% of its iron ore through a mix of cash, quarterly and indexed pricing mechanisms “a major departure from the 40- year tradition of annual iron ore contracts.

“The three large diversified miners appear to be maintaining their discipline, and not signing contracts below the established benchmark to appease the Chinese mills, and we view this discipline to be an attractive feature of the iron ore industry,” the investment bank noted in a research note to mining clients.

“BHP Billiton wishes to accommodate buyers who would like more short-term pricing, believed by some to be more transparent,” Mohr notes. “(But) I still think the three large producers — BHP Billiton, CVRD (Vale) and Rio Tinto — will continue to dominate and have considerable control of the iron ore market.”

At presstime, BHP traded at US$62.42 per share in a 52-week trading range of US$24.53-76.65.