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Miners agree landmark iron ore contracts

30 March 10 16:56 GMT

Two of the world's biggest mining companies have agreed landmark deals with Asian steel mills to buy iron ore on quarterly contracts.

The deals could mark the end of annual contracts that have formed the basis for pricing in the steel industry for decades.

Vale and BHP Billiton said the new system was fairer and more transparent.

The price of iron ore under their first quarterly contracts has risen strongly, reflecting increased demand.

'Ending confrontations'

According to reports, Brazil's Vale is now charging Japan's Nippon Steel around $105 per tonne of iron ore.

This compares with the 2009/10 annual price of around $62, that expires on Wednesday.

If Vale and Anglo-Australian BHP had continued with annual pricing, it is likely that the new annual price would also have been set around $105 per tonne, as demand for iron ore is now rising strongly again compared with 2009's much lower volumes.

But by moving to quarterly contracts, the two firms are hoping to end the friction that the old annual pricing system caused, especially when the cost of iron ore on the open market moved strongly up or down away from the fixed 12-month price.

"BHP Billiton today announced that it had reached agreement with a significant number of customers throughout Asia to move existing iron ore contracts that were previously priced annually onto a shorter-term basis," said BHP.

Pedro Gutemburg at Vale said: "The old system generates never-ending confrontations between buyers and sellers."

Chinese question

While Vale said it had signed new quarterly agreements with Japanese and South Korean steelmakers, BHP was more vague, only saying it had reached agreement with "a significant number of customers throughout Asia".

This leaves open the question as to whether China - the world's largest importer of iron ore - has also agreed to the new quarterly deals.

Some analysts have speculated that some smaller Chinese steel firms have also signed up, but the Chinese government has yet to make any announcement.

It also remains to be seen whether Rio Tinto, the third of the big three iron ore companies will follow Vale and BHP's lead. It has not yet commented.

Iron ore negotiations is a sensitive subject for Rio, especially a day after four of its executives were jailed in China for bribery related to iron ore price talks.

Some analysts think Rio will ultimately follow suit.

"Annual prices are a relic of the past," said Tim Schroeders at Pengana Capital.

"In today's environment, you need to be able to adjust to the market reality a lot quicker than on an annual basis."

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