Rio exits iron ore spot market, now selling at benchmark

SYDNEY (Reuters) - Rio Tinto is selling most of its iron ore at fixed or provisional benchmark prices, halting most of the spot market sales that made up half its first-half output, even as Chinese mills hold out for cheaper annual rates.

The comments by CEO Tom Albanese lend support to talk that many Chinese mills have tacitly agreed to the 33 percent price reduction set in May by Japanese buyers, although the Chinese industry as a whole has not formally accepted the benchmark.

“Right out now we are primarily selling at provisional pricing, reflecting the existing benchmark settlement we’ve had with Japanese and other producers and will continue to do so until circumstances change,” Albanese told reporters after the world’s No. 2 mining house reported a 54 percent slump in first half underlying earnings.

Rio Tinto RIO.AXRIO.L and other miners diverted millions of tonnes into the spot market earlier this year as mills outside China abruptly cut production due to the recession.

But demand from China soared as mills ran near flat out thanks to Beijing’s stimulus package, while speculators also built up iron ore and steel inventories, helping lift spot prices above $100 per tonne for standard 63.5 percent iron ore -- far beyond the roughly $63 a tonne benchmark set in May.

As spot prices surged, demands by the Chinese Iron and Steel Association umbrella group for a discount of as much as 45 percent this year appeared increasingly untenable.

Albanese said basing the sales on provisional prices equal to a 33 percent discount for ore fines and 44 percent for lump was “appropriate,” given the protracted discussions with the hold outs that have been clouded by the detention of four Rio Tinto iron ore negotiators last month.

Although about half the 77 million tonnes of iron ore that Rio Tinto mined in the first half of 2009 was sold on a spot market basis, Rio Tinto has been less vocal than fellow Australian BHP Billiton BHP.AXBLT.L in calling for an end to the 40-year-old system of annual benchmark prices.

A willingness among Asian steel makers to sign new long-term contracts showed there was still a place for the process, which BHP Billiton has labelled outdated, Albanese said.

China claimed a small victory in iron ore negotiations this week when it sealed a sales deal with upstart Australian miner Fortescue Metals Group FMG.AX for iron ore in the second half of 2009 at 3 percent less than this year's benchmark guaranteed with Japanese and Korean steel makers.

But the contracts covering 18 million dry tonnes of ore pale in size compared to the tens of millions of tonnes Rio and BHP have earmarked for the Chinese market this year.

“The price Fortescue is getting should not be taken as indicative of what Rio and BHP will get, said Mathew Kaleel, a director of commodities funds manager H3 Global Advisors. “In terms of volume there’s no comparison.”

Reporting by James Regan; Editing by Jonathan Leff