Update: Shorter contracts victory for miners

30th Mar 2010 07:15

Mining giant BHP Billiton has successfully persuaded several of its iron ore customers in Asia to move to shorter term contracts.The group said it has reached agreement with a significant number of customers throughout Asia to move existing iron ore contracts to a shorter term landed price equivalent basis; the contracts were previously priced annually.The renegotiated contracts cover the majority of BHP Billiton's iron ore sales volume.Reports indicate that Brazilian company Vale, the world's biggest iron ore producer, has also persuaded its Japanese customers to switch to a quarterly schedule. Sumitomo Metal Industries, Japan's third largest steelmaker, has agreed to pay Vale $100 to $110 per metric ton of iron ore for the second quarter of 2010. Vale has tentatively agreed quarterly pricing deals with other Asian steel companies that would represent a 90% increase on the previous settlement.The shift to shorter contracts represents a victory for the mining companies in their long campaign to wean customers off annual contracts on to what the producers regard as a fairer system. The other big iron ore producer, Rio Tinto, is also expected to try to persuade its Asian customers to move to a quarterly schedule this year. The current system of negotiating annual contracts has been in place for around 40 years. Steel mills have preferred annual contracts because it facilitates long term planning, but with commodity prices mostly heading north in recent years mining companies have been keen not to get locked in to providing raw materials at prices that bear little or no relation to spot prices.The need to try and project price trends over a 12-month period means negotiations between the miners and their customers are often a tortuous and tense process that can sour relations between the two parties.Last year negotiations between mining companies and Chinese steel mills broke down, a development that, in the opinion of a Shanghai judge, was a contributing factor to the downfall of the four Rio Tinto executives sentenced this week to long jail sentences for taking bribes and stealing business secrets.