rio seals china ore contract ... must read

Rio seals China ore price contract
Matt Chambers
June 24, 2008

TAKING advantage of soaring Chinese spot prices, mining giant Rio Tinto has been successful in its quest to secure a freight premium for Australian iron ore, locking in the biggest-ever rise in contract prices for Australia's most valuable commodity export.

Rio settled on an average price rise of 85 per cent for iron ore it sells to China's steel mills, who were led by Baosteel in the negotiations, beating the 71.5 per cent increase secured in 2005.

The huge hike in prices for the nation's most valuable commodity export will probably be closely followed by BHP Billiton and set a new Australian benchmark that will flow on to smaller producers.

Rio was late yesterday expected to announce it secured a 79.86 per cent price rise for benchmark iron ore fines and a 96.5 per cent hike in better quality lump, for an overall 85 per cent gain.

The gains came after Rio and BHP broke with tradition and declined to fall in line after Brazil's Vale (formerly CVRD) secured price gains of 65 per cent to 71 per cent.

Rio, following an unsuccessful attempt by BHP in 2005, argued that Australian iron ore miners were entitled to a higher price than CVRD because Asian steel mills were paying a lot less to ship our ore as freight rates surged.

Rio, which is defending a $US160 billion takeover bid from BHP, was aggressive in holding out for a freight premium, with chief executive Tom Albanese recently warning there was an "urgent" need to settle before June 30, when some contracts could be suspended and the ore sold on to spot markets at a big premium.

The freight premium equates to $7.43 a tonne over the fines price secured by CVRD, which is about half the long-term freight differential between Australia and Brazil but well below premiums of up to $60 a tonne under current freight rates.

It is also the first time different gains have been secured on quality by an Australian miner, and follows the lead set by Vale. It also illustrates the tight market for good quality iron ore as Chinese and Indian steel mills vie for supply.

The 85 per cent price hike was in line with analysts' expectations at Citi and Goldman Sachs JBWere, though in the last couple of months, expectations had grown, with some analysts predicting 95 per cent gains or more.

"It's a good result, and in line with expectations, though part of me is disappointed with the fines number," said one analyst, who declined to be named.

Iron ore exports were valued at $15.9 billion last financial year, more than both coking coal and thermal coal, according to Australia's government forecaster ABARE.

Rio has been playing hard for the price gains this year partly because it has a bigger exposure to moves in iron ore prices than rival BHP and a bigger hike would do more to boost Rio's argument that BHP has not offered enough in its 3.4-for-one takeover bid.

BHP, on the other hand, has stepped back from taking a lead in negotiations, keen not to stoke buyer concerns about its increased share of global iron ore exports if its bid is successful.

http://www.theaustralian.news.com.au/story/0,25197,23911397-643,00.html