BHP Wins Flexible Iron Ore Deals
Thursday, Jul 30, 2009
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SYDNEY/BEIJING (Reuters) - BHP Billiton on Wednesday announced iron ore deals with more of its customers, including more sales under flexible pricing schemes, adding to pressure on Chinese steel executives meeting this week in Beijing.
As the world's biggest steel industry began its two-day biannual meeting under unprecedented scrutiny in Beijing, BHP said 30 percent of its iron ore had been sold according to spot or index prices, or placed through quarterly contracts.
But still, 47 percent of the volume at the world's third-largest iron ore miner had yet to be priced for the fiscal year to March 2010 -- suggesting that many of its customers in the world's top buyer were still holding out.
The BHP announcement sheds some light on negotiations with Chinese mills, who have become increasingly impatient while the China Iron and Steel Association holds out for a better deal. In a sign that the annual two-day meeting will be fractious, even the association's own newspaper was banned from attending.
"I don't care any more if they announce a good price or a bad price. They should just get on with it and make a settlement, any settlement. Then everyone can carry on with their business," said an iron ore trader who did not participate in the meeting.
It is possible that much of the unsold volume is concentrated in the second half of the fiscal year, indicating that the interim deals between BHP and its Chinese customers covered most of its production in the second and third quarters of 2009, but that arduous negotiations still await.
The volumes sold likely include interim deals with Chinese mills, who broke ranks to ensure continuous supply while CISA, whose 72 members represent three-quarters of China's steel capacity, delayed agreeing to an annual settlement.
The talks with BHP, Rio Tinto and Vale were clouded this year by Rio's rejection of a further tie-up with Chinese aluminium champion Chinalco, and by China's detention of four Shanghai-based Rio employees for allegedly of stealing state secrets.
Only 23 percent of BHP's production volume have so far been settled at an annual contract price, at price cuts in line with those already settled between other mills and mines. That compares with 68 percent of volume sold through annual contracts last year, when BHP was trying to persuade sceptical Asian customers of the value of more flexible index pricing.
"I think BHP have made it quite obvious over the last few years that they're willing to move to a more flexible pricing arrangement. Obviously they're trying to pursue this in every opportunity they get," said Ben Westmore, an economist with the
National Australia Bank.
RANCOUR
The Chinese meeting agenda included how the steel industry is faring in the economic downturn and an annual overview by new Secretary General Shan Shanghua, who last year proposed that the Chinese industry move to quarterly pricing.
Chinese steel executives declined to comment on the status of the negotiations with any of the mills, as they filed in under a red banner proclaiming "Welcome to the Steel Sector Front Line!"
"We're still buying from our normal sellers," Hebei Iron and Steel chairman Wang Yifang told Reuters. His comment implicitly confirms a Reuters report earlier this month that most top Chinese mills had signed interim deals with the miners.
Shan's report will cover a fairly grim year for the association members.
China's largest mills suffered heavily from overcapacity and plummeting prices in late 2008, although prices have recovered thanks to China's stimulus package.
The smaller, more nimble private mills have done much better. The larger mills tend to blame them for undercutting prices and pushing up the cost of iron ore as they scramble to ensure supply, and CISA has expended a lot of its lobbying power over the last four years in limiting their ability to import and trying to force them to shut.
In an apparent recognition that the CISA strategy of top-down consolidation has failed and that its efforts to shut down capacity have in fact fuelled expansions, China is likely to set out new guidelines for restricting capacity through enforcement of emissions standards rather than size limitations.
The new measures will also share tax income among provinces, to help reduce local governments' opposition to mergers.
(Additional reporting by Sonali Paul in MELBOURNE, Chen Aizhu and David Stanway in BEIJING, and Alfred Cang in SHANGHAI; Editing by Sambit Mohanty)
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