Miners set for bumper profits

published 2 April 2010

Last year's annual iron ore price negotiations between Rio Tinto and China led to a stand-off that culminated in the arrest of four of the mining group's executives. They have been sentenced to prison terms ranging from seven to 14 years for bribery and stealing commercial secrets. But this year, iron ore should prove less of a headache for Rio. Vale of Brazil and BHP Billiton, which, along with Rio, dominate the market, have agreed quarterly contracts with Japanese and Chinese steel mills. This marks the end of a 40-year-old benchmark system of annual contracts between miners and key ore-consuming countries.

What the commentators said

"It's not every day that the pricing terms for one of the core commodities in world trade change," said Brendan Harris of Macquarie. Iron ore is the main ingredient in steel. The annual benchmark system has been "on its way out" for ages, said Breakingviews' Una Galani. Last year many mills wouldn't honour their contracts when spot prices fell below the annual benchmark. China didn't agree a benchmark at all as it couldn't negotiate a price lower than Japan had achieved.

Miners will rake it in this year, said William McNamara in the FT. The average spot price in the first quarter of 2010 was $131, while last year the benchmark was $60. But if prices start trending down, as Pedro Galdi of SLW Corretora pointed out, the quarterly system will favour mills over miners.