JOHANNESBURG (miningweekly.com) – The world's iron-ore majors appear to be winning the battle for greater iron-ore pricing transparency.

BHP Billiton CEO Marius Kloppers, who has been a vocal campaigner for shorter-term iron-ore pricing, has had a breakthrough in iron-ore sales pricing into Asia, hot on the heels of reports that the world's largest iron-ore producer Vale of Brazil is "close" to a quarterly pricing arrangement.

Vale, which defended the decades-old benchmark system, has also adopted a new marketing approach.

However, South Africa's largest iron-ore producer, Kumba Iron Ore, has for long seen merit in annual benchmark pricing, but leaves the settlements to the majors, including Vale, BHP Billiton and Rio Tinto.

BHP Billiton reports that most of its iron-ore sales are now short-term, following agreements with what the company describes as "a significant number of customers throughout Asia".

These customers have moved from existing annual iron-ore contracts to a shorter-term landed price equivalent basis, BHP Billiton says, adding that the change is consistent with BHP Billiton achieving market clearing prices.

Analyst Charles Kernot of Evolution Securities says in a note that BHP Billiton's new pricing news brings to a head considerable recent debate on future pricing mechanisms.

"We would expect other major iron-ore producers to settle along similar lines," Kernot adds.

Fairfax analyst John Meyer says that iron-ore contracts are increasingly moving to shorter-term pricing and that Vale indicates that it has settled on a 90% price increase with Japanese mills at $100/t to $110/t.

Stock Resources analyst Grant Craighead tells Mining Weekly Online's Australian desk that the move to shorter-term pricing is no surprise.

"Vale has been taking the lead in the current negotiations, and it is rumoured to be close to closing," Craighead reports, adding that shorter-term contracts circumvent the risk of mispricing when parties take advantage of dramatic spot price shifts.

He adds that the greater transparency that short-term pricing creates should be beneficial.

Kloppers is in favour of pricing transparency. He told Mining Weekly Online in a video interview last year, that iron-ore pricing was heading for change as a result of steel-pricing dynamics moving towards shorter contracts.

Kloppers pointed out to Mining Weekly Online at the time that products including oil, copper, aluminium and nickel had emerged from annual benchmark pricing in the seventies.

But, over time, the downstream processing step of oil refining and steelmaking had become a cost-plus business in which the raw materials, as well as the conversion margin, basically set the price.

With the rapid growth of the steel market in China, the steel-pricing dynamic 
had, however, changed towards shorter-term contracts.

This change had come about because steel producers which were locked into raw material prices for a year at a time, were often placed 
at a distinct disadvantage to 
rivals with shorter-term pricing arrangements.

"We have been very vocal, saying that this is a good thing, 
because we like pricing systems that are transparent, where the market discovers the price and where the customer and the supplier do not have to waste 
energy, and often goodwill, in 
establishing that price.

"That's certainly the case for most of our products and we think that's the way that the iron-ore business is heading," Kloppers said.

Coking coal – another steel-feed material – that BHP Billiton has been selling in China is already on a spot basis or at prices determined quarterly.

Price volatility is not a major issue for majors with a diversified portfolio because, if the iron-ore price falls, other prices in their portfolio may rise to offset any significant losses.

"We're not particularly concerned that the prices would move around a little more," Kloppers told Mining Weekly Online.

— With reporting by Esmarie Swanepoel in Perth

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