Rio Tinto Group, the world's second- largest iron ore exporter, said China may use a new pricing mechanism for contracts in 2010 after annual talks broke down this year with the top importing nation.
"We are hearing varied messages out of China, we have not yet commenced any negotiations there," Sam Walsh, chief executive officer of Rio's iron ore unit, said today at an investor briefing in Sydney. "Any number of scenarios could relate to an outcome in 2010 with one scenario being a different pricing mechanism in China to the rest of the world."
China this year demanded a bigger price cut for iron ore than the 33 percent offered to Japanese and Korean mills by Rio and BHP Billiton Ltd. The China Iron & Steel Association, or CISA, last month flagged it will seek to set prices separately from the rest of the world as imports and cash prices surged.
"Given we haven't settled a price for this year, the talks are still in limbo,' Alex Passmore, head of metals and mining research at Patersons Securities Ltd. in Perth, said by phone today. "It's a tough choice, which the industry is grappling with at the moment. The restructuring talks will continue."
London-based Rio dropped 1.6 percent to A$62.79 at the 4:10 p.m. Sydney time close on the Australian stock exchange. BHP fell 2 percent. The benchmark S&P/ASX 200 Index declined 2.2 percent.
Hu Tensions
Tension between China and Rio soared after Chinese authorities arrested four of Rio Tinto's iron ore executives, including Australian Stern Hu, for allegedly stealing commercial secrets and bribery. Hu and Ge Minqiang, Wang Yong and Liu Caikui remain in detention since their arrest in July. Rio may be shunned by China in this year's talks, UBS AG analyst Tom Price said last month.
Rio needs to hear from Baosteel Group Corp., China's largest steelmaker, and CISA "as to exactly what is their view in relation to prices," Walsh said during a Webcast of the briefing. "Certainly if there is any tinge of unfairness in relation to what's being structured, it would make benchmark negotiations very difficult."
BHP, the world's largest mining company, in July said it had agreed to sell 30 percent of its ore through a mix of cash, quarterly and indexed pricing, breaking with a 40-year tradition of annual contracts. Rio is selling ore to China now using a 'quasi-settlement' or provisional pricing based on its agreement with Japanese mills, Walsh said.
Both Sides
"Both sides will be considering a spot price at one end, annual negotiations at the other and in the middle there's quarterly resets or an index," Patersons' Passmore said.
Annual contracts for China should start from Jan. 1, Shan Shanghua, secretary general of the CISA, said Oct. 16. China could account for 60 percent of global seaborne iron ore trade, Shan said. China overtook Japan as the world's largest buyer in 2003 and now accounts for more than half of the seaborne trade, worth about $160 billion last year.
Japanese steelmakers are "very keen" to maintain the benchmark pricing system for ore, Walsh said. Contracts now start April 1, the start of the Japanese fiscal year.
Chinese steel output reached a record this year as the government invests 4 trillion yuan ($586 billion) in the economy, spurring public works building. The nation's cabinet in August said it was studying curbs on overcapacity in industries including steel.
Contract prices may jump 14 percent next year to the second-highest on record, according to a Bloomberg News survey last month of analysts. Vale SA, Rio and BHP, the world's three- largest producers, are boosting shipments from mines in Brazil and Australia as mills in China, Japan, Europe and the U.S. restart furnaces to meet demand for steel used in cars, construction and washing machines.
"We have not established contract prices for this year, neither has BHP Billiton nor Vale," Walsh said. The provisional pricing with China "clearly will be the starting point in terms of the negotiations for next year," he said.
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