Matt Chambers and Peter Alford From: The Australian
THE global iron ore pricing system is headed for the biggest shake-up in its 40-year history after Brazil's Vale, the world's biggest iron ore miner, backed BHP Billiton's quest to kill off the annual price-setting process.
If successful, the switch to spot prices could help double Australia's export revenue from its current level of $34 billion and dramatically increase investment in the resources industry.
The benchmark price is about $US60 a tonne while the spot price is hovering at $US125 a tonne.
Vale's push came as Rio Tinto, Australia's biggest producer, said changes to the pricing system were not occurring fast enough. The three mining giants, which control 70 per cent of the seaborne market, are now all agitating for change.
"If our customers want to keep a benchmark, they have to accept something . . . that is closer to the level of spot prices and that keeps the flexibility in the pricing system," Vale iron ore boss Jose Carlos Martins said yesterday in Brazil. If customers were not prepared to accept this, Vale was prepared to move to the spot market, Mr Martins said.
Start of sidebar. Skip to end of sidebar. End of sidebar. Return to start of sidebar. The huge increase in the size of the spot market -- it now comprises almost 50 per cent of the seaborne iron ore trade -- meant that the spot price should be seen as the market price, he said.
The move is an about turn for Vale, which was previously a steadfast defender of the current benchmark system, partly due to the freight advantage it gives the miner over Australian producers.
Vale's suggestion that any contract settlement price needed to be near current spot prices was in line with statements from BHP chief executive Marius Kloppers two days earlier.
The aggressive stance from both miners prompted analysts to issue reports saying that previous forecasts of a 40 per cent contract price rise in this year's talks were starting to look conservative.
Under the current benchmark system, which evolved in the late 1960s, prices for the Japanese financial year (starting April 1) are set through often terse annual negotiations.
They do not include freight. Thus Vale, which is further away from Asian markets, can get the same price as BHP and Rio.
Mr Kloppers has led the charge to end the benchmark pricing system, previously declaring BHP would not sign any new volumes to contracts set through annually produced pricing.
After Rio's full-year profit report on Thursday night, Rio chief executive Tom Albanese also expressed dissatisfaction with the current system. "There needs to be some changes to the system and it needs to be improved," he said.
For the benchmark system to survive it has to evolve. It is not evolving fast enough."
The statements from Vale, and to a lesser extent Rio, are expected to accelerate the demise of the current pricing system, under which Australia reaped $34bn of export revenue last financial year.
"Vale has certainly put the boot into the benchmark pricing system," Ausbil Dexia fund manager Adam Dixon said.
"Vale has never made any murmurs along this line and with the big producers now singing from the same songbook, it is going to be problematic for the steelmakers to keep the benchmark system."
It was positive for Australian iron ore producers and the prices they could achieve, he said.
The benchmark pricing system has yielded mixed results in the past year. No official settlement was reached with China last year and the previous year, BHP and Rio secured an allowance for cheaper freight costs.
In 2008, Rio started to sell as much of its iron ore on to the surging spot market as it could, in a move that BHP and steelmakers described as "not in the spirit of the contracts."
Mr Martins said the company would fulfil its contract obligations for a while, but customers needed to understand the difference between spot and contract prices could not be sustained.
Although Japanese steelmakers are hunkered down to fight any fundamental change to the annual contract system, the companies yesterday refused to comment specifically on Vale's apparent change of approach.
However, any push by the Australian miners during this year's contract talks for a more flexible pricing system will be seized upon by the Japanese mills to support their stand against the BHP-Rio production joint venture.
The Japan Iron and Steel Federation will argue to the Japanese Fair Trade Commission and to European Union anti-trust regulators that production-sharing will increase the Australian miners' leverage to force disadvantageous pricing arrangements on to steel producers.
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