Friday, June 5, 2009

Rio tie up unlikely to alter iron ore pricing

The traditional iron ore benchmark pricing system is unlikely to be changed by a tie up between world No. 2 and No.3 iron ore miners, Rio Tinto Ltd/Plc and BHP Billiton Ltd/Plc, BHP's chief executive said on Friday.

The system, where producers and steel firms decide prices of the around $88 billion a year seaborne iron ore trade , has come under strain this year as Chinese users ignore the traditional process where the first settled price establishes a benchmark.

BHP chief Marius Kloppers told a media conference the company continued to support index pricing of iron ore over a once-a-year mechanism that sets prices through negotiations, but change wasn't imminent.

''We think, that the way see it is that you should not expect a sudden change,'' Kloppers said, adding that miners and steel makers had been on a steady path over the last five years towards eventually adopting indexing.

Chinese steelmakers have rejected the 33 percent cut negotiated with Japanese and Korean rivals and are seeking bigger discounts as they deal with a slowdown in steel demand.

They are opposed to a shift in selling ore based on a futures index or prevailing spot market and want the cuts enshrined for the rest of the year in a benchmark format ''The Chinese position will not change in the negotiation even though the joint venture implies a big change in the fundamental situation. said Tian Zhiping, vice general manager of Hebei Iron and Steel Group.

''We are still seeking bigger price cut compared with the Japanese deal,'' he said.

BHP has stood alone in pursuing the demise of benchmark pricing, saying a continually adjusted price better reflects iron ore market fundamentals.

But its plan suffered a setback last week when Japanese and Chinese steel mills agreed to another year of fixed pricing.

A Chinese steel mill group also warned against placing undo significance on a combined Rio Tinto-BHP.

''This is just one joint venture deal between two companies.

We shouldn't conclude that this will definitely have an impact on international iron ore price negotiations,'' Zou Jian, a senior official at the China Metallurgical Mines Association, said.

Rio earlier on Friday said it was dumping plans for a $19.5 billion tie-up with China's Chinalco and agreed to set up an iron ore joint venture with BHP.

China Iron and Steel Association, the country's lead negotiator in the benchmark talks, has repeatedly opposed an iron ore index pricing system, declaring it would make it hard for steelmills to lock in production costs.

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