March 30 (Bloomberg) -- Vale SA, the world’s largest iron ore producer, and BHP Billiton Ltd. ended a 40-year system of setting annual prices by signing short-term contracts with Asian mills, with the Brazilian company winning a 90 percent increase.
Sumitomo Metal Industries Co., Japan’s third-biggest steelmaker, agreed to pay Vale $100 to $110 a metric ton for the three months beginning the April 1, spokesman Toshifumi Matsui said. BHP, the world’s largest mining company, today said it will sell the majority of its production to Asian steel mills on shorter-term contracts without giving pricing.
A Shanghai judge yesterday blamed the collapse of annual price talks last year on Rio Tinto Group executive Stern Hu and three colleagues for stealing commercial secrets, sentencing them to between 7 years and 14 years in prison for that charge and bribery. Moving to quarterly pricing will help producers benefit from surging spot prices for iron ore, which are trading at more than double the annual-contract price.
“This represents a significant win for BHP Billiton over Asian steel mills who have long resisted the move away from annual contract pricing,” said Ben Potter, an analyst at IG Markets Ltd. in Melbourne.
BHP, based in Melbourne, rose 1.4 percent to A$43.97 at 11:53 a.m. in Sydney trading. Rio climbed 1.1 percent to A$79.23.
“This is not a traditional benchmark outcome,” Amanda Buckley, a spokeswoman for BHP, said. “Details of the agreements with our customers are subject to confidentiality agreements,” she said, declining to comment on the price agreed or name customers.
Cash Prices
Cash prices have more than doubled in the past year, and BHP, Rio and Fortescue Metals Group Ltd. may be missing out on about $20 billion of sales a year by selling at benchmark contract prices instead of spot prices, Goldman Sachs JBWere Pty said March 1.
Baosteel Group Corp., representing China in iron ore price talks, last week said the contract pricing system needs improvement and it’s reasonable to expect “adjustments” to the way the products are priced. The breaking with tradition and a shortage of iron ore have led to tensions between producers and steelmakers, Baosteel Chairman Xu Lejiang said in a March 25 interview in Shanghai.
The four Rio Tinto employees convicted yesterday obtained secrets regarding steelmakers’ output and meetings of the China Iron & Steel Association from companies including Shougang Corp. and Laiwu Group, Chief Judge Liu Xin said. That led to the failure of iron ore price talks last year, the judge said.
Price Boost
Vale is seeking shorter-term contracts that may boost prices 90 percent, Credit Suisse Group said last week. Baosteel “will probably settle quarterly contracts within the next few days/weeks,” UBS AG said in a March 25 report.
“The agreements reached represent the majority of BHP Billiton’s iron ore sales volume,” BHP said today.
Prices were traditionally set each year from April 1. This year, Vale wants to set prices quarterly and BHP pushed to price its products based on an index, Baosteel’s Xu said. Rio, the second-largest iron ore supplier, said March 24 customers may settle prices on a quarterly basis.
“If the industry moves to a quarterly pricing, that will in fact be a true market mechanism, not driven by anyone in particular but driven very much by market forces,” Sam Walsh, the head of Rio Tinto’s iron ore operations, said March 24.
Missing Out
Chinese steelmakers decided to buy more iron ore on the cash markets after prices plunged 68 percent between February and October 2008 during the global recession. Prices have more than doubled since, according to Metal Bulletin, an industry publication.
China’s steel production gained 14 percent to a record 568 million metric tons last year as the government’s stimulus spending boosted demand from automakers and builders. China last year increased imports by 42 percent to a record 628 million tons as its $586 billion stimulus spending spurred demand.
Japanese steelmakers, including Nippon Steel Corp. and JFE Holdings Inc., are boosting exports to China and other emerging nations in Asia to counter waning local demand.
Rio Tinto’s Hu, an Australian citizen who led Rio’s China iron ore operations, was sentenced to 10 years in prison yesterday. His colleagues Liu Caikui, Ge Minqiang and Wang Yong were given prison terms of 7 years, 8 years and 14 years respectively, Liu said. They were also convicted of bribery.