Bloomberg News

BHP CEO Says Europe Mills Under Pressure, China Keeps Buying Ore

October 20, 2011

Oct. 20 (Bloomberg) -- BHP Billiton Ltd., the world’s biggest mining company, said a slump in demand for iron ore from European steel mills has hurt prices while orders from its largest customer China have so far been unaffected.

“In Europe, many steel companies have, or are in the process of, reducing their steelmaking capacity and I think that that is what’s played through on the sentiment in the iron ore business,” Marius Kloppers, chief executive officer of the Melbourne-based company, told reporters today in London. “In China overall, which will over the long run be the driver of prices, we have not seen anything really happening there yet.”

BHP is the third-largest exporter of iron ore, with sales of the steelmaking material generating $6.5 billion in earnings before interest, tax, depreciation and amortization in the 2011 fiscal year. While Chinese orders have held up, European steel mills have scaled back as a slowdown in economic growth erodes demand. ArcelorMittal, the biggest steelmaker, has idled plants in Luxembourg, France, Germany and Spain in the past two months.

The biggest iron-ore suppliers, including BHP competitors Vale SA, Rio Tinto Group and Anglo American Plc, last year ended a four-decade old industry practice of pricing sales annually in favor of quarterly accords. BHP continues to push for shorter- term pricing for all its products, Kloppers said today following the company’s annual general meeting in London.

Monthly Price

The company is now selling the “vast majority” of its ore on monthly prices, according to Kloppers, 49. “For all practical purposes, our stuff is monthly priced or even shipment-priced, which means you price it when the ship loads.”

Vale sees no reason to abandon quarterly price contracts and considers them “the most appropriate methodology” for iron ore, the Rio de Janeiro-based company said yesterday. The spot price of ore delivered to China fell 1.3 percent to $145.80 a metric ton today, the lowest in more than a year and about 17 percent below the fourth-quarter contract price. It’s down 19 percent in the past six weeks as traders delay orders.

“We’re seeing a set of conditions now, to a much lesser extent than annual contracts, but those customers that bought from other suppliers at quarterly prices are out of the market with where the price is today,” Kloppers said. “That always gives the less-creditworthy customers pause about where they think about what they do.”

Chinese Steel Drops

Crude-steel production in China fell in September to 56.7 million tons, the lowest level in seven months, according to data from the National Bureau of Statistics and compiled by Bloomberg. Output reached a record 60.3 million tons in May.

“BHP has been selling the highest proportion of ore at near spot or monthly pricing over the past 12 months and has the most experience extracting maximum value from a dynamic pricing environment,” Eugene King, a London-based analyst at Goldman Sachs Group Inc., wrote in a report today. “Rio and Anglo are more conservative historically, and would take time to adjust.”

Jiangsu Shagang Group Co., China’s biggest non-state steelmaker, may delay ore purchases should steel output need to be cut, Vice President Shen Wenming said in an Oct. 17 interview. Shen described China’s steel market as “very bad.”

In 2008, some steelmakers defaulted on shipments priced annually as spot prices for the ore moved below the contract price.

“I wouldn’t say that I’ve seen any of what I saw in the global financial crisis, which was the sort of equivalent of forum shopping where one party’s customers defaulted but bought from another customer,” Kloppers said. “These pricing arrangements have really seriously mitigated that sort of behavior.”

--Editors: Amanda Jordan, Todd White

To contact the reporter on this story: Jesse Riseborough in London at jriseborough@bloomberg.net

To contact the editor responsible for this story: John Viljoen at jviljoen@bloomberg.net


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