Bloomberg News

Rio CEO Sees China Iron Ore Buyers Shifting to Shorter Contracts

October 24, 2011

Oct. 24 (Bloomberg) -- Rio Tinto Group, the world’s second- largest mining company, expects its Chinese iron ore customers to shift to shorter-term price contracts for sales as the cost of the steel-making raw material tumbles.

Weakness in the market is “accelerating the move to shorter pricing methods and closer to spot,” Chief Executive Officer Tom Albanese told analysts in Sydney today, according to a presentation of slides on the London-based company’s website. Rio continues to sell all the iron ore it produces, he said.

About 86 percent of the company’s sales in the third quarter were priced on a quarterly basis, Albanese said.

The company’s iron ore unit last year generated almost $17 billion, or 62 percent of its earnings before interest, tax, depreciation and amortization. The world’s biggest iron-ore suppliers last year ended a four-decade old industry practice of pricing sales annually in favor of quarterly accords. The price drop may accelerate a push toward shorter contracts.

Albanese “indicated that given the sentiment turn and the fact that spot prices are below lagged quarterly contracts, it would not be surprising to see some Chinese contracts reneged on,” said Mark Busuttil, an analyst at JPMorgan Chase & Co. who attended the iron-ore producer’s briefing. “Should this eventuate, more contracts would move towards spot prices.”

The cash price of iron ore delivered to China, the biggest buyer of the material, has declined for the past 10 straight days, dropping 21 percent since Sept. 1. BHP Billiton Ltd., the world’s biggest mining company, is selling the “vast majority” of its iron ore on monthly prices, Chief Executive Officer Marius Kloppers told reporters in London last week.

Quarterly Price

Rio’s quarterly contract price for its customers of about $176 a metric ton is about 23 percent above the spot price of $142.60 a ton that some are paying, said Citigroup Inc.

“Rio expects the Chinese to move to shorter-term pricing, given the discount from the quarterly lagged price,” Citigroup analysts Heath Jansen, Clarke Wilkins and Anindya Mohinta said today in a note following the meeting with Albanese.

Vale SA, the biggest exporter, sees no reason to abandon quarterly contracts and considers them “the most appropriate methodology,” the Rio de Janeiro-based company said Oct. 19.

“There are marketing pressures stemming from a building Chinese customer push to pay something closer to the current spot price versus the quarterly trailing price applicable to fourth quarter sales,” Macquarie Group Ltd. analyst Lee Bowers said in a note today. Rio said shipments to Japan and Korea, making up about 40 percent of the company’s sales, will probably continue to be priced quarterly, according to Macquarie.

--Editor: Tony Barrett, Alastair Reed

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

To contact the editor responsible for this story: Amanda Jordan at ajordan11@bloomberg.net


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