iron prices up, page-2

Rio, BHP seek at least 71%

Vale gets 65% iron-ore price rise in Europe
AdvertisementJamie Freed
February 20, 2008

RIO TINTO and BHP Billiton are believed to be pushing for at least a 71 per cent increase in the benchmark price for iron ore after refusing to settle immediately for a 65 per cent gain.

On Monday evening, Rio said it was also pushing for a so-called "freight premium" because of the cheaper cost of shipping ore from Australia to Asia than from Brazil to Asia.

But analysts were doubtful it would achieve that goal. Some wondered whether that was Rio's real aim or if the argument was a stalking horse to help the Australian producers grab the 71 per cent price increase Brazil's Vale will receive for its higher-quality Carajas ore.

Vale settled for a 65 per cent rise for the majority of its ore and the larger increase for the higher-grade Carajas product. Both products have more iron content than most Australian ores.

Vale last year said it could seek a "quality premium" if its Australian rivals chose to seek a freight premium, so it is possible steelmakers will pay Rio and BHP the 71 per cent price because of the cheaper shipping.

Rio's push for the freight premium appeared to contrast somewhat with comments made by its iron ore chief executive, Sam Walsh, on several occasions during the last six months.

"There has been a freight differential widening," he told the Herald in August. "But you need to recognise that's for the spot market. It's not for where you have freight contracts locked in on a long-term basis [which many of Rio's major customers do]. In addition, there are quality trade-offs done in terms of ores from different countries as well. It's quite a complex thing."

Mr Walsh reiterated the comments about freight contracts during a media briefing in Perth last month.

In recent years, BHP been more aggressive in its public approach to iron ore negotiations than Rio. BHP last year declared the benchmark system "outdated" and argued for a move to a pricing index similar to that used for thermal coal.

In 2005, BHP did not immediately settle for a record 71.5 per cent benchmark price rise while it championed the freight premium issue, but eventually gave in.

Analysts said it was interesting that Rio, under threat of a takeover by BHP, had taken the harder public line this year.

"They have been very sneaky, Rio," said the ANZ senior commodities analyst Mark Pervan. "BHP has been the one making most of the noise in the last few years about this freight differential equalisation. What's now become apparent is Rio has a clause in its contract that says if BHP can negotiate an additional price for freight, they have the same outcome."

As a larger supplier of iron ore than BHP, Rio could have more leverage in the freight argument.

"Achieving this goal … would give more relative earnings momentum to Rio and put it further out of reach from BHP," said the Liberum Capital analyst Michael Rawlinson.

The Merrill Lynch analyst Vicky Binns said Rio and BHP would probably secure at least a 71 per cent rise in iron ore prices.