London, 9 April 2010

Rio Tinto revealed on Friday that its iron ore contracts with steel customers were being negotiated based on quarterly rather than annual pricing, bringing the miner in line with Anglo-Australian rival BHP Billiton and Vale of Brazil.

The three mining groups are the world’s three biggest iron ore exporters and the switch to quarterly pricing is expected to push up the price of steel, which in turn will hit the cost of cars and white goods.

Vale and BHP late last month agreed to a ground-breaking change in the iron ore system when customers were switched to quarterly priced contracts linked to the nascent iron ore spot market.

The agreements with Asain steel mills effectively killed the 40-year-old benchmark system of annual contracts and lengthy price negotiations that last year ended in acrimony when China demanded bigger cuts to the contract price than the miners agreed with Asian and European groups.

The global steelmaking industry reacted with fury to the change in ore pricing, accusing the mining groups of unfair pricing practices.

BHP had lobbied for years for a shake-up in the iron ore market based on shorter term pricing linked to the spot market. It has been moving customers on to quarterly pricing deals since last year. However, the big change came last month when Vale, a long-term advocate of the annual benchmark system and the world’s top iron ore exporter, also moved to quarterly pricing.

Rio is still expected to agree annual supply contracts with steelmakers but prices will be reset every quarter.

Sam Walsh, Rio’s iron ore chief, said there had been a structural shift in the iron ore market away from benchmark pricing.

“It is in line with our recent comments that benchmark pricing only works if it reflects market fundamentals, otherwise the system would need to change,” he said.

The new price system will lift the cost of iron ore to Asian steelmakers to about $110-$120 a tonne during the April-June period, up between 80 and 100 per cent from the $60 level at which the 2009-10 annual contracts were settled.

The Australian benchmark iron ore spot price 62 per cent iron content hit a fresh 18-month high of $166.20 per tonne on Thursday.

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