BHP’s Kloppers Winning War to End Annual Price Talks (Update2)

March 12 (Bloomberg) -- Marius Kloppers, chief executive officer of BHP Billiton Ltd., is winning his war on how the steel industry buys its raw materials.

BHP, the world’s biggest mining company, agreed last week to a coking-coal supply agreement with Japan’s JFE Holdings Inc., the first accord that will run for three months. Most coking coal is supplied on yearlong contracts based on a fixed price. Melbourne-based BHP is seeking deals that cover shorter periods and plans the same for the larger iron ore market as prices of both commodities climb on Chinese demand.

“It’s just a more sensible way of doing business and Kloppers sees that,” Neil Goodwill, an analyst in Melbourne at Goldman Sachs JBWere Pty, an affiliate of the world’s most profitable securities firm, said in an interview. “Recent history will show you a lot of value has been lost by using the contract system.”

BHP, Rio Tinto Group, and Fortescue Metals Group Ltd., which mine iron ore in Western Australia, may be missing out on about $20 billion of sales a year by selling at benchmark contract prices instead of cash prices, Goodwill said in a March 1 report. The cash, or spot, price paid by Chinese steel mills has doubled in the past year.

BHP declined 0.7 percent to 2,184 pence by 9:04 a.m. in London. The stock has risen 10 percent this year. Rio Tinto fell 0.6 percent to 3,680 pence.

Kloppers’ Scars

“If you have a more frequent readjustment of price, that is more reflective of the market,” said David Flanagan, managing director of Atlas Iron Ltd., an Australian iron ore producer. Atlas said March 10 it would start selling ore to Asian steelmakers using a mixture of cash and benchmark prices.

Kloppers has direct experience selling steelmaking ingredients. After stints working for Johannesburg-based fuels producer Sasol and management consulting firm McKinsey & Co., South African-born Kloppers joined miner Billiton Plc, later part of BHP. He became CEO of BHP’s Samancor unit in 2001, which made ferrochrome used in stainless steel. Kloppers became BHP’s CEO in 2007. He was unavailable for comment, London-based BHP spokesman Illtud Harri said yesterday.

“I carry the scars on my back for bringing this matter to the attention of the world,” Kloppers, 47, said in an interview in 2008, referring to the debate on pricing. Kloppers said last month he wanted an end to the months of “stressful” and “heated” annual pricing talks.

Grand Plan

Kloppers pushed successfully for quarterly pricing of manganese, another steelmaking ingredient, from an annual basis previously, said Tom Price, a commodity analyst at UBS AG in Sydney. Kloppers’ goal is to get customers to pay for coking coal and iron ore according to a constantly shifting price index, Price said.

“The endgame for BHP is to go towards an index,” he said. “Kloppers is a very aggressive marketing person, he comes from the marketing division of BHP and he’s got a grand plan.”

Iron ore and coking coal suppliers traditionally hold annual negotiations with steelmakers to fix benchmark prices that take effect from April 1, the start of the Japanese fiscal year. Negotiations took at least six months in 2008, and last year they failed to produce a recognized benchmark price. BHP also produces copper, oil, aluminum and silver, which are sold at market prices.

$200 Billion Market

JFE, Japan’s second-biggest steelmaker, said March 5 it will pay $200 a metric ton for coking coal under the terms of the three-month contract with BHP. The current cash price is about $220 a ton, according to JPMorgan Chase & Co. The benchmark contract price for the year ending March 31 is $129.

Iron ore and coking-coal prices surged in the past decade on soaring demand for buildings and automobiles in China, the world’s biggest steelmaker. Chinese coking-coal imports rose fivefold last year, Wu Xinchun, a consultant to the China Iron & Steel Association, said Feb. 5, fuelled by a $586 billion state stimulus program and the closure of small domestic mines.

“While the coking coal settlement is an important marker for the majors, it does pale into insignificance when compared with the quantum of upside that is on offer in the iron ore market,” Macquarie Group Ltd. analysts led by Brendan Harris wrote in a March 9 report.

BHP, London-based Rio and Brazil’s Vale SA control about two-thirds of the iron ore market, which is worth $200 billion a year according to Credit Suisse Group AG. Vale has told Chinese steelmakers it plans to drop annual price talks in favor of shorter contracts, according to Hu Kai, an analyst at research company UC361.com.

‘Huge Significance’

The Rio de Janeiro-based producer sent a note to major Chinese steelmakers, who haven’t decided what their responses will be, Hu said from Shanghai, citing mills he didn’t name.

A Vale official in Rio de Janeiro who declined to be identified because of company policy declined to comment when contacted by Bloomberg News. Ding Shouhu, an iron ore manager with Baosteel Group Corp., the company leading talks with suppliers, also declined to comment. Chen Song, an iron ore official with Magang (Group) Holding Co., China’s ninth-largest steelmaker, said it hadn’t received a notification from Vale.

BHP, the third-biggest shipper of iron ore after Vale and Rio, boosted sales from Western Australia on a mix of cash, quarterly and index pricing to 46 percent in the fiscal first half, from 30 percent in the previous half. Cash iron ore prices in China, the biggest steelmaker, are trading at more than double the contract price of about $61 a ton for Australian ore.

Volatile Earnings

Iron ore was BHP’s third most profitable unit in the six months through Dec. 31 with $2.09 billion in earnings before interest, tax, depreciation and amortization, or 24 percent of the company’s total Ebitda. Iron ore accounted for $3.83 billion, or 46 percent, of Rio’s Ebitda in the period.

Earnings for iron ore miners will be “far more volatile” should there be a switch to quarterly pricing, according to Royal Bank of Scotland Plc analysts led by Warren Edney.

The significance of what BHP has achieved in coking coal “is huge” said UBS’s Price. “A change in a price mechanism is very rare for any commodity market.”

To contact the reporters on this story: Jesse Riseborough in London at jriseborough@bloomberg.net; Rebecca Keenan in Melbourne at rkeenan5@bloomberg.net