China may get new iron ore pricing system

PUBLISHED : Tuesday, 03 November, 2009, 12:00am
UPDATED : Tuesday, 03 November, 2009, 12:00am

Rio Tinto may use a new pricing mechanism to determine how much China will pay for iron ore after the failure of talks this year, chief executive Sam Walsh said.

'Any number of scenarios could relate to an outcome in 2010, with one scenario being a different pricing mechanism in China to the rest of the world,' Walsh told an investor conference in Sydney yesterday.

Although discussions over how much China is to pay for iron ore are due to start this month, there is no agreement over the mechanism for deciding the price. Miners and steel mills have for 40 years negotiated a so-called benchmark price in Asia and Europe. China started direct talks with the miners two years ago.

This year, China failed to agree a benchmark price and the talks broke up in acrimony after Chinese steelmakers asked for a 45 per cent discount on last year's price but the miners refused to budge from a 33 per cent discount agreed with Japan and South Korea.

The atmosphere further soured in July when Rio's chief negotiator in China, Stern Hu, and three staff, were arrested for alleged bribery.

The China Iron and Steel Association (CISA), which led this year's talks, said last month it would seek to set prices separately from the rest of the world.

CISA head Shan Shanghua told a conference in Qingdao recently that in future, China would not accept prices negotiated by other countries and all Chinese steel mills should adhere to a uniform price for iron ore.

Industry observers say Shan faces huge difficulties in enforcing this and in effect eliminating the spot market on which thousands of China's smaller steel mills depend.

Analysts say China will continue to face difficulties in asserting itself against the big Australian miners so long as demand for steel continues to grow.

This year, the discussions are being led by Baosteel Group Corp, China's largest steelmaker, with CISA in an advisory role.

Walsh said Rio was waiting to hear Baosteel's view on prices for next year. 'Certainly, if there is any tinge of unfairness in relation to what's being structured, it would make benchmark negotiations very difficult,' he said.

Alex Passmore, the head of metals and mining research at Patersons Securities, said there were a range of options that had been discussed as possible alternatives to the present benchmark system. They included using spot market prices, basing prices on an index or resetting prices on a quarterly basis.

'I don't know which system they will end up using but there is clearly an impasse at present,' he said.

'While the Japanese prefer the benchmark system, it seems the Chinese would prefer a more flexible system. Perhaps something linked to the spot price of steel.'

BHP Billiton, the world's largest mining company, is already using a system comprising a mix of the spot market, quarterly resetting of prices and index prices for selling some of its iron ore.