BHP breaks from annual coking coal prices

Reuters | Mon, 08 Mar 2010 10:32

[miningmx.com] -- Top global miner BHP Billiton's move to shorter-term coal prices for steelmills is likely to be followed for iron ore contracts that could help the company earn billions of dollars more in annual revenues.

BHP made clear that a deal with Japan steelmaker JFE to move to shorter term prices for coking coal is a broader plan to sell hundreds of millions of tonnes of coal and iron ore to top consumers like China under prices that change every quarter at least, instead of a 40-year-old system of annual price deals.

"These settlements reflect the company's commitment to achieving market-clearing prices over time across all its bulk commodities," BHP said in a statement on Monday.

Chief Executive Marius Kloppers's aim to eliminate annual pricing by the world's top coking coal producer and No. 3 iron ore miner is expected to set a trend for major miners such as Rio Tinto and Vale to follow, an analyst said.

"As far as the suppliers go, the benchmark (for coking coal and iron ore) is dead and buried," said Michael Bentley, a portfolio manager for Sydney-based funds manager Northward Capital.

Goldman Sachs JBWere estimates BHP and fellow Australian miners Rio Tinto and Fortescue Metals Group are missing out on $20 billion in revenue from iron ore sales alone under annual benchmarking.

"With coal now moving to quarterly price review, we're expecting iron ore to follow in due course," said a bulk commodities trader based in Adelaide.

"That will give the producers a leg up as long as the high spot price holds."

Spot iron ore prices on a landed China basis are trading around $133 a tonne, double the 2009 free-on-board benchmark.

BHP rose 2.4 percent in Australian trading to A$43.51, outpacing a less than 1 percent rise in the wider market and in step with gains for Rio Tinto.

PRICE TALKS WITH CHINA

Rio and BHP are locked in negotiations with Chinese steelmills and other Asian firms to reach some type of annual price agreement for 2010/11 iron ore sales after failing to get an accord last year.

But in the first break in annual price talks this year, Japan's JFE Holdings Inc, the world's sixth-biggest steelmaker, on Friday said it had agreed to pay BHP $200 per tonne for coking coal for shipments between April 1 and June 30.

That is 55 percent over the benchmark price of $129 for the 2009/10 financial year, ending March 31.

Typically, BHP sets the benchmark for all subsequent deals for the same period, indicating rival producers will now have to choose annual contracts or quarterlies, as well.

"We expect a mixture of both in the coming weeks," UBS said in a client note.

Steelmakers in other countries also took note of the JFE deal.

"Once we understand the constituents of the contract, we can react to it," a senior official in a mid-sized Indian steel company that imports coking coal said. "BHP has to come to everybody and make an offer. But any kind of price increase at this point will be a strain on steel costs. The fundamentals of demand are still very fragile in the West."

Xstrata Peabody and other coal producers in Australia have yet to start price negotiations over sales of low-volatile and semi-soft coking coal.

The hike was in line with media and analyst reports and represents a discount of about 10 percent from the current spot market price of about $220-$230 a tonne.

It is the first time a Japanese steelmill has caved into BHP's demands for a quarterly pricing contract, though a JFE spokesman said this did not necessarily mean the firm had scrapped annual benchmarking altogether.

Japan's steelmills had long-resisted the shift because automakers and other big customers normally pay for their steel on an annual basis.

Other steelmills contacted by Reuters said talks were continuing.

"We are still in talks with BHP. Nothing has been decided yet," a spokesman for Posco of South Korea, Choi Doo-jin, told Reuters by phone.

"The talks are likely to be concluded this week if the market and supplier accept the 55-percent rise as a benchmark price," an industry source close to the negotiations said.

Global coking coal supplies are scarce after a surge in demand from China.

In 2009, China imported 34 million tonnes of coking coal, which was almost a five-fold increase from the previous year.