BHP Billiton has upped the ante in its war on the benchmark pricing of iron ore, slamming the system as unsustainable. In a wide-ranging speech this week that included bullish comments on China, iron ore chief Ian Ashby said BHP was realising negative value from its Pilbara assets because iron ore was being sold below market value.
“The Brazilian-delivered benchmark price has tracked far more closely to the China spot price than Australian prices,” he said at the Diggers and Dealers conference in Kalgoorlie. “This means that the Australian benchmark prices have nearly always traded at a discount to the true market clearing price. “These pricing relationships are unsustainable in our view.”
Traditionally industry-wide benchmark prices are negotiated between major iron ore miners BHP, Rio Tinto and Brazilian miner Vale and Asian steel mills. But tension emerged in recent months as the major miners wrestle with Chinese mills over contracts in the wake of the commodities crash.
The spot price reportedly topped $US110 a tonne this week, up from about $US60 in April, as China’s $586 billion stimulus package ignites demand for steel.
Rio Tinto’s iron ore contract price to Japan and Korea, by comparison, is about $US60 a tonne free-on-board. Spot prices include shipping costs, which are about $US15 a tonne from Australia to China. “There is a distinct and serious tension between the way prices are settled on an annual basis and what the market is prepared to pay for a tonne of iron ore,” Mr Ashby said.
China’s iron ore imports jumped 35 per cent in July from a year earlier to 56.5 million metric tonnes. Meanwhile, BHP iron ore production from the Pilbara slumped 10 per cent in the June quarter year-on-year. But Mr Ashby expected iron ore demand to remain high.
“In China, in particular, we expect steel demand growth to continue despite the current volatility,” he said. “China has started on the development path and we don’t see any reason for this trend not to continue.”
Junior WA iron ore miners Grange Resources and Atlas Iron also expect increased demand. “We’re seeing sustained growth in demand,” Atlas managing director David Flanagan said. But juniors often have a different take on the pricing issue because they need long-term contracts based on benchmark prices to secure financing for projects.
“To get a project up, to get it funded, you actually need certainty of revenue so it actually is very good for small guys like us to have a benchmark system,” Gindalbie Metals chief executive Garrett Dixon said at the conference.
Mr Flanagan said Atlas had locked in agreements based on a “mutual fairness clause” that averages out the difference between the spot and the benchmark price.“We would get half the upside, but also share half the downside,” he said. “If the spot market were to fall we don’t want them to have to feel as though they are being penalised by paying above the market rate, but at the same time if it goes above we don’t want to be penalised.”
