Rio, BHP to push for 80 pct iron ore hike

Reuters | Fri, 05 Mar 2010 13:37

[miningmx.com] -- Australia's Rio Tinto and BHP Billiton could hold out for -- and get -- an 80 percent increase in the price of iron ore, their second highest annual hike ever, to help fund expansion, if the mining giants should lose a battle to switch to spot pricing.

Analysts and fund managers told Reuters the world's second and third largest iron ore producers respectively were driving steel mills to accept increases of 80 percent as an alternative to adopting indexing for the 2010/11 shipping year.

Speaking on condition of anonymity because they did not want to appear to be siding with the mining houses amid price talks, the analysts said steel mills were warming to the idea of an 80 percent rise in contract prices next year.

"Given the way the spot price is running, 80 percent is starting to look cheap," an Australia-based mining analyst said. Spot iron ore on a landed China basis is trading around $133 a tonne, double the 2009 free-on-board contract.

An 80-percent boost would dramatically improve both firm's price to earnings ratios, boost credit ratings and ensure billions of dollars in added revenue to help pay for new mines planned in the Australian Pilbara iron belt.

"If the iron ore miners win only a 70 percent increase then, at its current share price, Rio Tinto would be trading on a P/E of only eight," a fund manager based in Singapore said.

Rio now trades at a forward PE of 13.8 and BHP trades at a PE of 18.1, Reuters data shows.

A Reuters poll this week showed analysts have increased expectations for annual prices to a median 40 percent versus 30 percent at the end of January.

But the poll includes several contributions that have not been updated or are under review. Excluding those numbers, the median forecast is for an increase of 65 percent.

ArcelorMittal, the world's biggest steel maker, reportedly already is bracing for a hike of 70 to 80 percent for the shipping year starting April 1, a view increasingly in line with forecasts.

A Chinese media report this week that global miners are offering Chinese steel mills a 50 percent rise in iron ore prices has been dismissed by analysts as posturing.

Rio and BHP have become increasingly frustrated over an inability to persuade steel mills across Asia to drop the decades-old one-price-a-year system and agree to set prices quarterly, or even monthly or daily.

BHP Chief Executive Marius Kloppers has called for an end to annual pricing, saying the system is antiquated and out of touch with changing market conditions. Kloppers last month said the only number that should be followed was the spot price, which equated to a 90 percent hike at the time.

Rio and BHP are locked in negotiations with Chinese mills to reach some type of agreement for 2010/11. A 50 percent hike would send the price of iron ore fines to about $91.50 per tonne.

Investment bank Morgan Stanley has tipped iron ore prices to rise 60 percent. Japan's Nomura Holdings Inc says a 70 percent hike is likely.

But analysts remain divided over whether Rio and BHP will agree to price ore on an annual basis at all this year, given the run up in spot.

"This may be the year they draw a line in the sand and say, 'It's over, no more'," said James Wilson, a mining analyst for DJ Carmichael & Co.

Goldman Sachs JBWere analyst Neil Goodwill believes Rio, BHP and smaller rival Fortescue Metals Group may be missing out on a combined $20 billion in annual sales revenue by not selling iron ore at cash prices.

BHP has already earmarked investment of $1.93 billion to spruce up rail and port facilities in the Pilbara, which will cover about half the cost of lifting annual output by 17 percent to 240 million tonnes.

Rio aims to boost production 6 percent to a record 230 million tonnes in 2010 and is considering a leap to 330 million within five years.