China Pays More for Australian Iron Ore

By From news reports

Rio Tinto Group said Monday that Baosteel Group, the largest steel maker in China, would pay it at least 80 percent more for iron ore.

Rio, fending off a $171 billion hostile takeover bid from BHP Billiton, and BHP have demanded for the first time in the Asian market a bigger increase than Vale do Rio Doce in Brazil, the world’s largest exporter of the raw material. Rio and BHP have argued that their Australian ore costs less to ship. Chinese mills have failed to stop six years of price increases that drove up their costs.

Baosteel agreed to pay Rio $144.66 a metric ton for ore known as Pilbara blend fines for the year that began April 1, Rio said. The Chinese steel maker will also pay Rio $201.69 a ton for Pilbara blend lump, 97 percent more than a year earlier. Demand for iron ore is still very strong, said Sam Walsh, chief executive of Rio’s iron ore business.

“I am happy that the market is starting to realize that” the freight differential should be reflected in the iron ore price, the BHP chief executive, Marius Kloppers, said in London.

It costs about $55 a ton less to ship ore from Australia compared than from Brazil. Chinese steel makers have argued against paying Rio and BHP a so-called freight premium. Vale said in February it received an increase of from 65 percent to 71 percent for annual contracts.

“Rio has wanted to achieve higher ore prices to help defend a takeover bid from BHP,” said Hu Kai, an analyst in Shanghai with specialist Web site Umetal.

China might increase imports of iron ore by 14 percent, to 435 million tons this year, the China Metallurgical Mining Enterprise Association said in April. China may raise steel output as much as 10 percent this year, the China Iron and Steel Association predicted.

Baosteel, which negotiated on behalf of the Chinese steel industry, said the traditional annual pricing system had been maintained despite an unprecedented divergence in the price increase of Australian ore and Brazilian ore. It termed the negotiations with Rio as “friendly.”

John Meyer, head of resources at Fairfax I.S. in London, said: “This is an extremely healthy price for Rio Tinto. It’s about $14 higher than we had expected.”

Both BHP and Rio are now trying to move away from term prices that for years have stayed well below spot rates for lower-quality ore, to an index system or some other, more flexible mechanism that reflects spot demand and prices. They are also backing attempts to create iron ore swaps markets, and, possibly someday, an iron ore futures market.

Baosteel, which has benefited from relatively low term prices even as growing Chinese steel output caused spot ore markets to soar, was adamant the annual system still existed.

“The result represents the sincerity from the two sides to maintain the traditional pricing system and a result from joint efforts of the enterprises that carry responsibilities,” Baosteel said.

“Chinese steel mills support Rio Tinto to boost investment and increase output further to meet market demand.”

Originally published by Reuters, Bloomberg.

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