BHP may seek iron ore price rise after Rio deal

LONDON Tue Jun 24, 2008 12:55pm EDT

Picture shows the main pit at a Rio Tinto iron ore mine at Tom Price, about 1,300 km (800 miles) north of Perth May 28, 2008. REUTERS/Tim Wimborne

Picture shows the main pit at a Rio Tinto iron ore mine at Tom Price, about 1,300 km (800 miles) north of Perth May 28, 2008.

Credit: Reuters/Tim Wimborne

LONDON (Reuters) - BHP Billiton (BHP.AX) (BLT.L) said on Tuesday that Rio Tinto's (RIO.L) (RIO.AX) record iron ore price settlement with China's Baosteel failed to provide an adequate freight premium, signaling it may seek a further price hike.

Rio secured a price increase of up to 96.5 percent from Baosteel (600019.SS) on Monday, the biggest rise in at least a decade, putting further pressure on steelmakers by setting a precedent for the industry and adding to fears of inflation.

Rio's near doubling in the term price increases eclipses the 65 to 71 percent that Asian mills and Brazilian miner Vale (VALE5.SA)(RIO.N) clinched in February, but BHP, the only major producer still in talks, hinted that it may still not be enough.

"We're delighted to see the progress," said Marcus Randolph, chief executive for ferrous and coal at BHP Billiton, referring to the price rise. "But it doesn't actually cover the full difference."

It costs $55-$60 per tonne less to ship ore to China from Australia than from Brazil, he said.

"What's effectively happening is we're not getting paid for our product the same price as somebody else is for their similar product delivered into China ... We're substantially disadvantaged on price," Randolph said.

BHP and Rio typically follow the first settlement reached, but the stakes have been raised this year as the value they can squeeze out of their iron ore assets is seen as a key factor in the $167 billion BHP bid for Rio.

But many analysts say it will be difficult for BHP to secure a further price increase from its negotiations with the Chinese steelmakers, as there's already a benchmark price settled.

"China can say they've already got supplies from Rio and Vale and that may lessen BHP's ability to get a further rise," said analyst David Thurtell at BNP Paribas.

STAKES HIGH

The stakes are also high for steelmakers like Baosteel, whose shares slid 8 percent on Tuesday on worries about higher costs after the deal.

Asian steelmakers would be hard hit by further hikes.

Steelmakers in South Korea and Taiwan are waiting for Japanese mills to reach a deal with Australian miners, but can continue to pay last year's prices up to September.

Other Asian steelmakers' shares were also lower, with South Korea's Posco (005490.KS), the world's number four steelmaker, down 1.9 percent despite an announcement that it would raise steel prices by 21 percent in July.

In London, BHP ended the day 0.16 percent higher while Rio was up 0.6 percent, both outperforming Britain's FTSE .FTSE index which fell by more than half a percent.

Steelmaker ArcelorMittal (ISPA.AS) closed down 1.5 percent, slightly underperforming the DJ Stoxx European basic resources index .SXPE, which was down 1.2 percent.

For European steelmakers, analysts say the picture is slightly different as they are more comfortable in passing their costs to their customers.

"Tight steel supply fundamentals will allow steelmakers to continue passing on these costs through higher steel prices," said Jeffrey Largey, analyst at JP Morgan.

In Europe, major steelmakers such as ArcelorMittal and Corus, owned by Tata Steel have raised their prices several times to far this year.

"So far steel customers have either been able to absorb higher steel prices or pass it on to their customers. To date we haven't seen the end users truly push back," Largey said.

COMPELLING

BHP also raised the reserves at its major Western Australia Iron Ore operation by 23 percent, and said the iron ore division would triple its capacity between 2007 and 2015.

"This is an indication of the future potential of these assets," Randolph said. Chief Executive Marius Kloppers emphasized BHP would work for a strong performance with or without Rio.

"The proposed acquisition of Rio Tinto does not deviate from our strategy by one inch. The combination is compelling but ... with or without Rio Tinto, BHP will continue to search for strong performance in the future," Kloppers said.

This year is the first time that miners have not all accepted the same percentage change in iron ore prices, opening the door to further differentials by quality and region.

That could change the tenor of annual term price negotiations, in which traditionally all mills and miners accept whatever settlement is reached first.

Miners signaled they wanted to move away from the system. President of Vale, Roger Agnelli, said at an event in Sao Paulo that the breaking of the so-called benchmark precedence system is a positive sign.

Kloppers said BHP has stopped signing long-term iron ore contracts on traditional benchmark terms and it was not interested in selling on the spot market, but would renegotiate contracts on market-related terms.

"We have undertaken that we will not sign any new (benchmark) contracts ... as they expire, which will take some years, we will sign new contracts on new transparent terms."

The annual pricing system has proven too inflexible as rapidly expanding Chinese steel capacity caused spot iron ore prices and freight rates to balloon over the last few years.

For a graphic of Asian iron ore prices, click on: here

(Additional reporting by Lucy Hornby in Beijing, James Regan in Sydney, Miyoung Kim in Seoul, Yuko Inoue in Tokyo, Lee Chyen Yee in Taipei and Alfred Cang in Shanghai; editing by Paul Bolding)

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