BHP Agrees on New Iron Ore Pricing System for 30% of Customers

By Rebecca Keenan and Jesse Riseborough

July 29 (Bloomberg) -- BHP Billiton Ltd., the world’s largest mining company, agreed to sell 30 percent of its iron ore under new pricing mechanisms, signaling a break with the 40- year-old tradition of settling annual contracts in Asia.

This ore will be sold through a mix of cash, quarterly and indexed pricing, Melbourne-based BHP said today in a statement. About 23 percent will be sold under fixed-price contracts at 33 percent less than last year’s price and talks for the remaining 47 percent of volumes are continuing, it said.

Chief Executive Officer Marius Kloppers has been pushing for an end to the annual pricing system and is selling more ore on the cash market after prices soared this decade on demand from China, the biggest buyer. Talks between China and Rio Tinto Group, which has four executives detained by Chinese authorities for allegedly spying, have stalled over the size of a price cut.

“It is going from the silly archaic annual benchmark method to something more sophisticated,” Tom Price, a commodities analyst at Merrill Lynch & Co. in Sydney, said today by phone. “It was never going to happen instantly overnight, it was always going to be a transitional thing.”

BHP declined 1.6 percent to A$37.43 at the 4:10 p.m. Sydney time close on the Australian stock exchange. That compares with a 2.4 percent drop in Rio Tinto and a 0.6 percent drop in the benchmark index.

‘Practically Dead’

Kloppers said in May the annual benchmark system was “practically dead,” according to a report from Bank of America’s Merrill Lynch & Co. unit. Goldman Sachs JBWere Pty and Morgan Stanley have both said producers may agree to more flexible contract pricing, including quarterly revisions, to help end this year’s deadlock in talks with Chinese steel mills.

“The company believes that current settlements are indicative of continued progress towards transparent market pricing,” BHP said in the statement. BHP didn’t specify which customers had agreed to the different pricing mechanisms.

The 33 percent price cut agreed for contract prices matches the accord settled in May between Rio, the world’s second- largest iron ore exporter, and mills in Japan and South Korea. Chinese steel mills have been insisting on a contract price cut of as much as 45 percent.

The spot price for Australian ore at a grade of 62 percent of iron has gained 56 percent since the first quarter and traded unchanged at $91.90 a ton yesterday, the highest this year, according to The Steel Index. This includes freight charges of about $13.50 a ton for shipping ore to China from Australia. The Australian contract price this year is about $61 a ton. Rio, BHP and Brazil’s Vale SA are the world’s three largest exporters.

‘Big Change’

“This is a big change,” Mark Pervan, head of commodity research at Australia and New Zealand Banking Group Ltd., said today by phone from Melbourne. “It is certainly going to devalue” the benchmark system or make it less relevant, he said.

Chinese mills are still in talks with BHP, Rio and Vale, said Jiangsu Shagang Group Co. Chairman Shen Wenrong. Shan Shanghua, general secretary of the China Iron and Steel Association, didn’t comment when reached on the phone today. Qi Xiangdong, deputy secretary general, said he couldn’t comment on price talks.

Nippon Steel Corp. spokesman Hayato Uchida said: “The company doesn’t coment on individual price talks.” Posco, Korea’s biggest steelmaker, is still in talks with BHP, spokeswoman Choi Youn Joung said today.

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