Link: http://www.telegraph.co.uk/finance/newsbysector/industry/mining/7539366/Iron-ore-prices-to-soar-90pc-after-Asia-deal.html

Iron ore prices to soar 90pc after Asia deal

Iron ore prices will almost double from April 1 after the world's largest exporter agreed significant price rises with Asian steel mills.

By Garry White, Commodities
Published: 8:47PM BST 30 Mar 2010

Brazil's Vale will increase prices of the core steelmaking ingredient by 90pc, a spokesman for Japan's Sumitomo Steel confirmed.

The news came on the day BHP Billiton won its campaign to move to a quarterly pricing mechanism, ending 40 years of annual price agreements.

In what one analyst called a "momentous day" for BHP, the company said that it had reached a deal with a significant number of customers throughout Asia to move existing iron ore contracts to a quarterly basis.

"The agreements reached represent the majority of BHP Billiton's iron ore sales volume," the company said.

This implies that Chinese steel mills have caved in to demands from the mining giant, as 64pc of iron ore sales in the second half of last year were to Chinese mills, although BHP would not confirm this.

There is one other significant change in the pricing mechanism, which will favour Australian producers. Shorter-term contracts will be on a "landed price equivalent" basis. This means the miner will pay the shipping costs to its customer.

Previously, annual benchmark contracts had been on a "free on board" basis, which meant miners delivered ore to the port and the customer was responsible for the shipping. This is advantageous to BHP and Rio Tinto as their mines are closer to Asia than Vale's operations in Brazil.

"The shift will enable BHP Billiton to derive the geographic advantage that its vast Pilbara operations offer by capturing any freight rate differential that may again open up between it and competing Brazilian supply," Brendan Harris, a mining analyst at Macquarie Bank said.

Vale has agreed to sell Nippon Steel, the largest steelmaker in Japan, ore at $105 (£70) a tonne for the April-June quarter, according to reports from Japan. This is 90pc higher than the annual price agreed in March last year. It is believed that South Korea's Posco has also agreed to the price increase. The annual system of setting prices collapsed last year after China failed to reach agreement with major producers.

Shares in BHP added 16p to £22.84 and Rio Tinto shares rose 16.5p to £39.27 in afternoon trade.

WHY THE CHANGE?

Annual price adjustments mean steady cash flow for miners, but the system is not flexible enough to lock in price rises when demand for iron rises fast.

Iron ore spot prices soared in the second half of 2009, but miners were selling at prices agreed in March. Goldman Sachs said Australian-based miners lost $20bn (£13.2bn) last year by selling at benchmark.

Good Luck to all!