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well hold on tight, 90% increase in price means iron ore companies will rocket up after confirmation that Vale and the Japanese have agreed on the new pricing.

Vale, BHP End Annual Ore Talks; Vale Wins 90% Jump (Update3)
By Yasumasa Song and Masumi Suga

March 30 (Bloomberg) -- Vale SA, the worlds largest iron ore producer, and BHP Billiton Ltd. ended a 40-year system of setting annual prices by signing short-term contracts with Asian mills, with the Brazilian company winning a 90 percent increase.

Sumitomo Metal Industries Co., Japans third-biggest steelmaker, agreed to pay Vale $100 to $110 a metric ton for the quarter starting April 1, spokesman Toshifumi Matsui said. BHP, the largest mining company, today said it will sell the majority of its production to Asian steel mills on shorter-term contracts without giving pricing.

A Shanghai judge yesterday blamed the collapse of annual price talks last year on Rio Tinto Group executive Stern Hu and three colleagues for obtaining commercial secrets, sentencing them to between 7 years and 14 years in prison for that charge and bribery. Moving to quarterly pricing will help producers benefit from surging spot prices for iron ore, which are trading at more than double the annual-contract price.

This represents a significant win for BHP Billiton over Asian steel mills who have long resisted the move away from annual contract pricing, said Ben Potter, an analyst at IG Markets Ltd. in Melbourne.

Nippon Steel Corp., Japans largest steelmaker, also reached a tentative price agreement for the April quarter, President Shoji Muneoka said today in Tokyo without providing pricing details. The Sumitomo Metal pact with Vale is a tentative agreement, spokesman Matsui said.

BHP, based in Melbourne, rose 2.4 percent to A$44.41 at the 4:10 p.m. close in Sydney. Rio climbed 1.1 percent to A$79.25.

Break With Tradition

This is not a traditional benchmark outcome, Amanda Buckley, a spokeswoman for BHP, said. Details of the agreements with our customers are subject to confidentiality agreements, she said, declining to comment on the price agreed or name customers.

Vale wants a new pricing system to improve pricing flexibility, predictability and transparency, Pedro Gutemberg, director for marketing and research at Vale, said today at a conference in Beijing. He didnt confirm the price agreement with Sumitomo Metal.

For us, the benchmark system is old, so we decided to go this route, Gutemberg said.

Japanese steelmakers will get in touch with their domestic customers about the change in pricing iron ore quarterly, said Muneoka, who was at a media briefing held by the Japan Iron and Steel Federation, which he chairs.

Considering the industry stability and the impact on our customers, we still believe that annual benchmark prices are desirable, Muneoka said.

Prices Double

Cash prices have more than doubled in the past year, and BHP, Rio and Fortescue Metals Group Ltd. may be missing out on about $20 billion of sales a year by selling at contract prices instead of spot prices, Goldman Sachs JBWere Pty said March 1.

Baosteel Group Corp., representing China in iron ore price talks, last week said the contract pricing system needs improvement and its reasonable to expect adjustments to the way the products are priced. The breaking with tradition and a shortage of iron ore have led to tensions between producers and steelmakers, Baosteel Chairman Xu Lejiang said in a March 25 interview in Shanghai.

China, the largest buyer of iron ore, is still in price talks with the three biggest producers, Luo Bingsheng, vice chairman of the China Iron & Steel Association, said today over the phone. Chinese mills oppose a demand to increase prices by 90 percent, the group said March 16.

Some Chinese steelmakers have privately reached deals with the suppliers though official talks are ongoing, Deng Qilin, general manager of Wuhan Iron & Steel Group, said this month.

Commercial Secrets

The four Rio Tinto employees convicted yesterday obtained secrets regarding steelmakers output and meetings of the China Iron & Steel Association from companies including Shougang Corp. and Laiwu Group, Chief Judge Liu Xin said. That led to the failure of iron ore price talks last year, the judge said.

Steelmakers in China should pay a premium to other Asian mills because of the risks of doing business there and their need to secure supply, according to Michelle Applebaum Research Inc. The conviction of the Rio workers highlighted the risk, it said in an e-mailed report.

The agreements reached represent the majority of BHP Billitons iron ore sales volume, BHP said today.

Prices were traditionally set each year from April 1. This year, Vale wants to set prices quarterly and BHP pushed to price its products based on an index, Baosteels Xu said. Rio, the second-largest iron ore supplier, said March 24 customers may settle prices on a quarterly basis.

Market Mechanism

If the industry moves to a quarterly pricing, that will in fact be a true market mechanism, not driven by anyone in particular but driven very much by market forces, Sam Walsh, the head of Rio Tintos iron ore operations, said March 24.

Rio Tintos Melbourne-based spokesman David Luff declined to comment on its talks, citing the companys policy of not commenting on price negotiations.

Chinese steelmakers decided to buy more iron ore on the cash markets after prices plunged 68 percent between February and October 2008 during the global recession. Prices have more than doubled since, according to Metal Bulletin, an industry publication.

Rios Hu, an Australian citizen who led Rios China iron ore operations, was sentenced to 10 years in prison. His colleagues Liu Caikui, Ge Minqiang and Wang Yong were given prison terms of 7 years, 8 years and 14 years respectively.

To contact the reporters on this story: Masumi Suga in Tokyo at [email protected]; Yasumasa Song in Tokyo at [email protected]

Last Updated: March 30, 2010 04:29 EDT