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BHP in focus after Rio secures record iron ore prices

By Lucy Hornby and James Regan
/ Source: Reuters

By Lucy Hornby and James Regan

BEIJING/SYDNEY (Reuters) - The focus in annual iron ore price talks shifted on Tuesday to whether BHP Billiton would convince Chinese steelmakers to pay more than the record settlement reached with Australian rival Rio Tinto a day earlier.

Rio's near doubling in term prices increases eclipses the 65 to 71 percent that Asian mills and Brazilian miner Vale clinched in February, but BHP, the only major producer still in talks, hinted that it may still not be enough.

The two miners typically follow the first settlement reached, but the stakes have been upped this year as the value they can squeeze out of their iron ore assets is seen as a key factor in the $167 billion BHP bid for Rio.

The head of BHP's ferrous and coal business, Marcus Randolph, said on Tuesday that Rio had failed to achieve an adequate freight premium in its deal with Baosteel. It costs $55-$60 per tonne less to ship ore from Australia than from Brazil, he said.

BHP also raised the reserves at its biggest Western Australia Iron Ore operation by 23 percent, and said the iron ore division would triple its capacity between 2007 and 2015.

"This is an indication of the future potential of these assets," Randolph said.

The stakes are also high for steelmakers like Baosteel , which settled on Monday with Rio and saw its share price slide 8 percent on Tuesday on worries about higher costs.

A failure by Baosteel to reach a settlement with BHP in a meeting on Tuesday morning puts Asian steelmakers at risk of further hikes.

Steelmakers in South Korea and Taiwan are waiting for Japanese mills to reach a deal with Australian miners, but can continue to pay last year's prices through September.

Other Asian steelmakers' shares were also lower, with South Korea's Posco , the world's No. 4 steelmaker, down 1.9 percent despite an announcement that it would raise steel prices by 21 percent in July.


This year is the first time that miners have not all accepted the same percentage change in iron ore prices, opening the door to further differentials by quality and region.

"The benchmark pricing has system has now increased in complexity. There is now a benchmark for each product," said an industry executive.

That could change the tenor of annual term price negotiations, in which traditionally all mills and miners accept whatever settlement is reached first.

The annual pricing system has proven too inflexible as rapidly expanding Chinese steel capacity caused spot iron ore prices and freight rates to balloon over the last few years.

BHP and Rio have called for annual price talks to be replaced by a more flexible index pricing system. They also want higher prices to offset the lower cost of shipping ore from Australia, compared with Brazil.

Rio and BHP shares both rose 3 percent in Australian trading, with Rio turning in a marginally stronger performance.

The Chinese industry would have had to begin paying much higher spot rates for iron ore from Rio Tinto had it failed to reach a settlement by June 30.

While the Vale deal differentiated the price rise based on the iron content of the ore, the Rio deal establishes a premium for lump ore which moves it closer to pellet prices. Lumps and pellets can be directly used in blast furnaces.

Baosteel agreed to a 79.88 percent price rise for Rio Tinto's Pilbara blend fines and Yandicoogina fines, and a 96.5 percent price rise for Pilbara blend lump for the fiscal year 2008.

No price has yet been announced for Rio Tinto's lower quality Robe ore.

For a graphic of Asian iron ore prices, click on:

($1=6.874 Yuan)

(Additional reporting by Miyoung Kim in Seoul, Yuko Inoue in Tokyo, Lee Chyen Yee in Taipei and Alfred Cang in Shanghai)