BHP Billiton Sees a Shift to Monthly Iron Ore Pricing

BHP Billiton Ltd., the world’s biggest mining company, said it expects a shift toward monthly pricing agreements for iron ore which better reflect the market and the needs of producers and consumers.

“We expect there will be continued progress toward shorter term monthly pricing,” Mike Henry, president of marketing at the Melbourne-based company, said today at a Steel Business Briefing conference in London. Shorter term pricing “will ultimately be the truest reflection of underlying supply and demand fundamentals,” he said. Iron ore is used to make steel.

Vale SA, Rio Tinto Plc and BHP, the three biggest exporters of iron ore, this year abandoned a 40-year custom of setting prices annually in favor of quarterly contracts. A further shift to monthly contracts by BHP contrasts with comments from rivals at Brazil’s Vale and London-based Rio this week.

“BHP has been at the forefront of these changes,” Ian Roper, a commodities strategist at CLSA Ltd. in Shanghai, said in an interview today in London. While steel mills “don’t like volatility” they can cope when prices for raw materials and steel “move in unity,” he said.

Mining companies and steelmakers should seek a better pricing system, Shan Shanghua, general secretary of the China Iron and Steel Association, said on Sept. 28. Pricing iron ore based on indexes doesn’t accurately reflect the Chinese market, he said. China is the world’s biggest buyer of iron ore.

Defaulting on Contracts

The association is in talks with producers to price contracts on a monthly basis, China Minmetals Corp., the nation’s biggest metals trader, said this month. Such a move would increase the chances of Chinese steelmakers defaulting on contracts, Minmetals’ Vice President Feng Guiquan said Sept. 6.

Quarterly pricing is based on an average spot index price for three months. Contract prices are set to fall 11 percent to $129 a metric ton in the quarter starting on Oct. 1 from the previous three months, said Hu Kai, an analyst at, citing Platts index prices. The price rose 0.2 percent to $141.10 a ton today, according to the Steel Index.

“Pricing against liquid spot indexes will ultimately mitigate the risk of contract non-performance in times where spot prices move significantly above or significantly below contract prices,” BHP’s Henry said today.

‘System Isn’t Perfect’

Rio Tinto this week said it doesn’t plan to price sales monthly and Vale’s Jose Carlos Martins, executive director of sales, said yesterday the company doesn’t expect “big changes” to the way ore is priced.

“The system is not perfect, but it’s working,” Vale’s Martins said in Dalian. “Customers are fulfilling their contracts. It seems the price is good because otherwise the customers would go to spot.”

Rio will give the new quarterly pricing mechanism a “chance to operate” this fiscal year, Warwick Smith, managing director of sales and marketing at the company’s iron ore business, said on Sept. 28. The company will continue talks with customers in Japan, Korea and China on further evolution in pricing, he said.

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