rio bhp face lower iron ore prices

Rio, BHP Face Lower Iron Ore Prices, Macquarie Says

Oct. 13 (Bloomberg) -- Rio Tinto Group and BHP Billiton Ltd., the world's second- and third-largest iron ore suppliers, may have to cut annual contract iron ore prices next year because oversupply may send spot rates lower, Macquarie Group Ltd. said.

``Reports from China indicate that spot prices are likely to fall further amid continuing oversupply,'' Macquarie analysts led by Jim Lennon said today in a note. ``If this is the case, it would appear likely that the pressure on Australian suppliers to lower their 2009 benchmark prices will grow and grow.''

UBS AG is forecasting contract iron ore prices will drop 15 percent next year, the first decline in seven years. Cash prices for ore sold to China plunged 20 percent last week to about 820 yuan ($120) a metric ton as mills cut output on slowing demand from carmakers and builders.

Spot prices are now at about $90 a ton, Macquarie said. Benchmark contract prices for Australian fines ore were settled this year at $144.66 a dry metric ton, or $91.20 a ton, according to Merrill Lynch & Co. Inc. BHP, Rio and Brazil's Cia. Vale do Rio Doce, the world's biggest iron ore producers, usually begin annual contract talks in October to set prices for the following year beginning April 1.

Part of the decline in spot prices comes from a reduction in freight costs, Lennon said. The Baltic Dry Index, a measure of shipping costs for commodities, has plunged 77 percent since the end of June.

Melbourne-based BHP rose 8.2 percent to A$30.00 at the 4:10 p.m close in Sydney, countering an 8.8 percent decline last week as global markets sank on credit concerns. Rio Tinto , based in London and traded there and in Sydney, rose 8.7 percent to A$79.36.

``We don't comment on pricing,'' Rio spokesman Gervase Greene said by phone from Perth. BHP spokeswoman Samantha Evans declined to comment.

Lack of Credit

Steel mills in China are cutting demand for iron ore and asking mines to postpone deliveries because of slower sales and a lack of credit, Mt. Gibson Iron Ltd., an Australian producer, said Oct. 9. Some of its customers want shipments delayed until the second quarter of the financial year, it said.

``The outlook for crucial coal and iron ore contract pries seems to be fraying at the edges,'' ABN Amro Holding NV analysts led by Kieran Davies said in a research note dated Oct. 10. There is ``some doubt over whether Australian contacts will be renewed next year at the same high prices.''

Still, the decline in spot iron ore prices may be ``over- done'' and prices could stabilize at more than $100 a ton in the New Year, Macquarie said. If spot prices rose, Australian and Brazilian suppliers could argue for an unchanged contract price next year, Lennon said.

Vale is seeking a second price increase from Asian mills to match what European steelmakers are paying for ore from Rio and BHP. Vale settled its contract prices in February, securing a 71 percent gain. BHP and Rio won increases of as much as 97 percent in July.