Iron ore price could double in BHP push Sarah-Jane Tasker From: The Australian February 15, 2010 12:00AM
CHINESE steel mills could be hit with a record jump in iron ore prices this year, as BHP Billiton chief executive Marius Kloppers continues to flag the rising spot price as the best indicator for where this year's talks are headed.
Mr Kloppers' comments on the ABC's Inside Business program yesterday came as reports out of China suggested that BHP had reached an interim price deal with some Chinese steel mills for a 40 per cent increase over 2009-10 iron ore benchmark prices.
The reports cited Hu Kai, a senior analyst with Chinese steel industry research house UC361, as saying that the deals were "short-term contracts" and did not represent a final agreement on the 2010-11 benchmark.
A BHP spokeswoman yesterday declined to comment on the market speculation, but the chief executive of the world's largest miner continued to talk up the expectation of a significant rise in prices this year.
"For iron ore, coking coal, the prices that we get today were settled at the depth of the economic crisis so I think there's probably a good chance that they will go up from where they are today," he said.
Mr Kloppers said the market price was what the benchmark price was supposed to reflect.
"So, I don't know what the price settlement will be when we get to that point. What I do know is that today's price is almost double last year's benchmark, which was set in the depth of the financial crisis," he said.
The benchmark price is about $US60 a tonne -- down from the 2008-09 record of $US90 a tonne -- while the spot price is currently sitting above $US125 a tonne.
A contract price of $US125 a tonne would more than double the value of Australia's iron ore exports, currently $34 billion a year.
Mr Kloppers' push to end the benchmark system received a boost last week from Brazilian rival Vale, the world's biggest iron ore miner, which joined calls for a shake-up of the system.
Vale iron ore boss Jose Carlos Martins said last week that customers who wanted the benchmark had to accept a price closer to the level of spot price.
He said the increase in the size of the spot market, which accounted for about 50 per cent of the seaborne iron ore trade, meant the spot price should be seen as the market price. With Vale ready to play hardball on price negotiations and BHP selling ore into a mix of short-term reference pricing contracts, the reports out of China of a 40 per cent increase seem doubtful. Experts expect a much bigger rise.
Macquarie analysts, led by Colin Hamilton, said Vale would play hardball in the 2010-11 negotiations and would accept nothing too far from the prevailing spot. "Given this situation, and the strong prevailing spot price, there is almost immediate upside potential to realised contract iron ore prices for 2010," he said.
Mr Hamilton added that Australian producers were "sitting pretty at the present time" because poor production and exports from Brazil had benefited local producers.
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