Rio: Iron ore price drop accelerating move to shorter contracts

Andrew Topf | October 24, 2011 | 8:47 pm Top Companies China Europe Iron Ore

As the price of iron ore continues to tumble, Chinese buyers of the crucial steelmaking ingredient are backing away from quarterly contracts in favour of cheaper monthly contracts or spot prices.

Weakness in the market is “accelerating the move to shorter pricing methods and closer to spot,” said Rio Tinto CEO Tom Albanese, speaking to analysts in Sydney today, Bloomberg reported.

While most (86%) of Rio’s third-quarter sales were priced quarterly, Bloomberg quoted one JP Morgan Chase & Co. analyst saying that given that spot prices are lagging below quarterly contracts, “it would not be surprising to see some contracts reneged on” and therefore more movement towards spot prices.

Rio’s quarterly prices are running at about 23% higher than spot prices, which are currently around $140 a tonne.

Meanwhile Vale SA and BHP Billiton, Rio Tinto’s closest two competitors in the iron ore space, have differing views on the matter. According to Bloomberg, BHP is selling the “vast majority” of its iron ore at monthly prices, while Vale “sees no reason to abandon quarterly contracts.”

MINING.com reported last week that slow economic growth in China, the world’s largest steelmaker, is softening prices for iron ore, which hit a 15-month low last week, and steel, which has dropped to its lowest point in 10 months.

The situation is being exacerbated as the Big 3 iron ore producers — BHP Billiton (NYSE:BHP), Vale SA (NYSE:VALE) and Rio Tinto (LON:RIO) , and Australia’s Fortescue Metals Group (ASX:FMG) — crank out product at record levels.

The situation today marks a dramatic shift in the dynamic between iron ore producers and Chinese steel mills. At the end of August MINING.com reported iron ore miners were calling the shots as Chinese steelmakers’ profits melted away.

BHP, Vale and Rio Tinto control nearly 70% of the 1 billion tonne annual iron ore seaborne trade and dominate price talks which in the past were characterized by secretive negotiations and annual contracts.