BHP: Almost half of iron ore was sold off contract prices

With demand booming, spopt iron ore prices spike

Dave Hannon -- Purchasing, 1/21/2010 1:58:13 PM

Mining giant BHP Billiton said demand for its iron ore was so strong that it sold a record 32.5 million metric tons in the quarter ended December 31, with 46% of its haul from Western Australia sold at spot rates rather than annual contract prices in the second half of 2009. That's up from a reported 30% in the first half of 2009.

"During the December quarter we saw strong price recovery across the commodity suite driven by demand in China and restocking in the developed world," BHP said in a statement. That trend was confirmed by official customs figures released by the Chinese government today that showed total imports over December rose 22% from the previous month to reach 62.2 million metric tons, the second highest monthly total on record.

And it wasn't just BHP that benefitted from the demand spike. Rio Tinto saw record shipments from its Pilbara mine and Fortescue Metals Group, Australia's third-largest iron ore exporter, said second-quarter shipments jumped 44% in the quarter ending December 31.

According to a report in the Financial Times, Johan Rode, a mining analyst at Citigroup in London, says that, excluding freight, iron ore prices averaged $82 a metric ton in the spot market in the second half of last year, 36% above the annual contract rates, and are even higher today. Fortescue says current iron ore spot prices are as high as $110/metric ton.

The volatility and increasing spot-market activity has increased the rhetoric from iron ore suppliers in favor of doing away with the annual contract pricing system and relying solely on market pricing. In a statement today, Fortescue said, "Going forward, it is widely forecasted that the annual benchmark price will increase significantly in China and elsewhere, if and when new benchmark pricing arrangements are set for the 2010/11 contract year...It also remains a possibility that, as per the previous contract year, there will not be a benchmark agreed for China in the next contract year beginning April 1, 2010."