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iron ore sector

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    Demand will slacken, the Co's with high grade, high tonnage, low impurites will survive in the downturn....

    More woes ahead for major iron ore producers

    November 5, 2008

    IRON ore earnings forecasts for Rio Tinto and BHP Billiton could be cut after it has emerged the miners may not be receiving the full benchmark price for all of their shipments.

    The chief executive of Brazilian rival Vale, Roger Agnelli, yesterday accused Rio of selling iron ore to Asian customers at the record benchmark price but agreeing to cover freight costs in recent weeks. Rio arranges the freight for its customers on more than half of its shipments, and some of the vessels were booked months ago, when shipping costs reached record levels.

    "Other companies, they bought and they were long in freight at the beginning of this year and late last year," Mr Agnelli said during an investor briefing in New York. "Today they are selling iron ore in China at the benchmark price and giving the client the freight. The name is Rio Tinto [which] is doing that. It is not Vale."

    The cost of shipping iron ore from Western Australia to Japan has fallen from $US40 a tonne this time last year to $US5.10 a tonne. If Rio is covering freight costs - it refused to confirm this - its iron ore margins would be lower than expected.

    As demand slackens, Chinese mills are believed to be angry with Rio's choice earlier this year to meet only 90 per cent of the commitment of its contracts and to sell the remaining 10 per cent on the then-higher priced spot market.

    BHP's strategy of not signing contracts to cover its full output - leaving 10 to 15 per cent available to sell on the spot market - also appears questionable now that spot prices are 40 per cent lower than contract prices.

    Rio has said it may not meet its target of 5 million tonnes of spot sales during the second half of the year, but the Herald understands BHP is continuing to sell on the spot market, even as the price received has plunged to $US60 a tonne, compared with $US100 a tonne benchmark price average of lump and fines.

    In August, BHP said it expected to sell about 19 million tonnes of ore on the spot market this year, compared to 11 million tonnes last year.

    Vale last week said it would shut in 30 million tonnes of its higher-cost production due to the weak steel market, but Rio and BHP have not yet announced any production cuts.

    "They can't do anything because they are committed to the merger, Rio Tinto and BHP," Mr Agnelli said. "They can't cut production … because they depend on European Commission clearance. This is the reality."

    He said Vale had cancelled plans for a 12 per cent price rise to meet the price gained by its Australian rivals. He added that Vale was more concerned with keeping prices high than maintaining volumes during a downturn.

    Mr Agnelli said benchmark iron ore pricing negotiations were unlikely to start in earnest until early next year, and noted it was possible the price would fall for the first time since 2002.

    Like Fortescue Metals, Vale has been more supportive of the benchmark pricing system than its rivals and has not sold ore on the spot market.
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