New Pricing System for Iron Ore, Key for Steelmaking

Rio Tinto, the British-Australian mining giant, said it had joined two other global mining companies and decided to sell iron ore based on quarterly prices, a move that effectively ends a decades-old benchmark annual pricing system.

Rio Tinto, the British-Australian mining giant, said it had joined two other global mining companies and decided to sell iron ore based on quarterly prices, a move that effectively ends a decades-old benchmark annual pricing system.

Rio Tinto, the British-Australian mining giant, said it had joined two other global mining companies and decided to sell iron ore based on quarterly prices, a move that effectively ends a decades-old benchmark annual pricing system.

The decision means that the world’s three biggest exporters of iron ore — Rio Tinto, BHP Billiton and Vale of Brazil — have each decided this year to abandon selling iron ore to global steel mills using annual, fixed-price contracts.

“The benchmark system is over,” said Melinda Moore, an equity commodity analyst at Credit Suisse. [br]

“No longer will we have annual iron ore price negotiations behind closed doors with a cigar and whiskey in hand,” she was quoted in this article in the New York Times.

The move, which has been contemplated for several years but resisted by some in the industry, including Rio Tinto, is expected to bring greater transparency to the pricing of iron ore, which is used to produce steel.

But the move comes at a time when global steel makers are complaining about the pricing power of the mining giants and the skyrocketing price of iron ore and other raw materials.

Recently, the price of iron ore has climbed to about $160 a ton. In the decade before 2004, though, the price of iron ore hovered around $20 a ton, according to analysts.

Steelmakers fear that prices will rise even more in the short term, partly because China’s building boom is stimulating demand.[br]

“The benchmark system had its failings,” said Nicholas Walters, a spokesman for the World Steel Association in Brussels. “But it had one large advantage: in a world where capital investments are just enormous, having some sort of medium-term stability in pricing is a very important ingredient.”

For decades, the benchmark pricing system allowed the steel companies to lock in iron ore prices for a year under annual contracts. Those deals, in turn, allowed mining companies to make long-term investment decisions.

But in China, a dual system that had both benchmark prices and spot, or market, prices, led to corruption, with some steel mills agreeing to pay bribes to get cheaper access to iron ore at the lower of the two prices.

China’s state-controlled iron and steel association has called the big iron ore producers a cartel and accused them of manipulating prices and negotiating unfairly in closed-door meetings to set the annual price.

A spokesman for the China Iron and Steel Association declined to comment on Rio Tinto’s announcement.

Last year, in what some analysts say was a sign of China’s frustration over the negotiations, Chinese authorities arrested four Rio Tinto employees, including an Australian citizen, on suspicions they stole secrets that gave their company an edge in negotiating annual contract prices with Chinese steel mills.

Last month, a Chinese court sentenced the four Rio Tinto employees to long prison terms for accepting millions of dollars’ worth of bribes and stealing commercial secrets from Chinese steel executives and passing them on to Rio Tinto.

Rio Tinto denied any wrongdoing in the case, but after the verdict the company dismissed the four employees, saying there was substantial evidence in court that they had taken bribes without knowledge of the company.

The announcement that Rio Tinto was moving to quarterly pricing was made on Friday – the best time to hide bad news 😉 – in a brief statement posted on the company’s Web site.

The move came soon after BHP Billiton and Vale said they had begun making iron ore deals based on quarterly prices, with BHP saying it had already made a significant number of deals with steel mills in Asia.