BHP Wants Index for Price Talks BUSINESS ASIA By Bloomberg

By Jesse Riseborough and Helen Yuan

BHP Billiton, the world’s largest mining company, wants to introduce an iron ore price index, increasing pressure on Asian steel mills to pay more under annual contracts with demand set to outstrip supply through 2015.

“This is something that we are looking at based on our Western Australian iron ore products,” Emma Meade, a spokeswoman for BHP, said Wednesday. “It is clearly not relevant to this year’s negotiations.”

The proposed index of spot trades by suppliers to mills would be used to help set annual rates and be based on cash prices, which jumped in September to more than triple the 2007 benchmark because of demand from China. Mills like Baosteel Group are to start contract talks in November with suppliers BHP, Rio Tinto Group and Vale do Rio Doce.

“It would shift the power in the market much more towards suppliers,” Gerard Burg, a minerals and energy economist at National Australia Bank in Melbourne, said Wednesday.

“I wouldn’t expect them to be too receptive,” he said, referring to the mills.

Gervase Greene, a spokesman for Rio’s iron ore unit, declined to comment on the proposal.

The proposed index would be similar to the globalCOAL index where parties trade directly with each other, Peter Toth, BHP’s marketing director for carbon steel materials, said.

Iron ore benchmark prices are set for 12 months starting April 1 after talks between major suppliers and mills. Spot iron ore prices, which are determined on a single-cargo basis, have reached $185 a ton, according to Credit Suisse Group on Sept. 28. That compares with the 2007 benchmark Australian price for long-term contracts of $51.47 a ton. About 90 percent of BHP’s sales are under contracts, according to Credit Suisse.

“The current iron ore pricing mechanism is supported by European, Japanese and Chinese steel makers and the miners,” Chen Xianwen, deputy director of market research at the China Iron & Steel Association, said Wednesday during a conference in Dalian, China. “The established mechanism should be protected, though we welcome any suggestions that would benefit both sides.”

Baosteel may have to accept a bigger increase in benchmark iron ore prices than the 9.5 percent gain it negotiated at the end of 2006, the smallest advance in four years. Iron ore demand from China, which produces a third of the world’s steel, has sent contract prices up threefold in the past five years.

“It is a demand-driven market, it is not a price-driven market, so this is why you will see the creation of a spot index,” said Mark Pervan, a commodity strategist at Australia & New Zealand Banking in Melbourne.

Iron ore imports to China, the world’s largest buyer of the material, will rise 11 percent next year to an estimated 410 million metric tons, Luo Bingsheng, vice chairman of the China Iron & Steel Association, said Wednesday in Beijing.

The market may be under-supplied until 2015, Merrill Lynch analysts led by Vicky Binns said in a report Monday, citing BHP’s Toth in an analysts’ briefing during visits to the company’s operations in Western Australia State.

“The current system has brought good stability for 12 months where you know what you are going to get,” said Peter Chilton, a fund manager at Constellation Capital Management in Sydney. “The new system might bring more volatility. Bearing in mind it is a very capital intensive business, I’m not sure that is necessarily the right thing.”

BHP will spend more than $15 billion to almost double its iron ore output from Australia to 300 million tons annually by 2015, Ben Williams, vice president of sales and marketing at the carbon steel materials unit, said Tuesday in Dalian.

“A good index could help buyers and sellers to have a common view of the market clearing price and could help to facilitate a faster, less stressful and less confrontational process to agree on an annual price,” BHP’s Meade said. “This would work well in both a strong and weak market.”

Originally published by Bloomberg News.

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