JOHNNESBURG (miningweekly.com) – There may not be an iron-ore price settlement at all this year, and the "provisional" prices that are being charged by iron-ore producers may become the effective benchmark settlement prices, analysts tell Mining Weekly Online.

Drama clouded this year's iron-ore price talks when the Chinese government detained Rio Tinto executive Stern Hu and three of his colleagues.

In the past, the first agreement of the season became the industry benchmark, but that tradition has been gradually breaking down.

In the absence of a benchmark-price determination, iron-ore producers have, in the main, been charging "provisional" prices to contract customers and index-linked prices to new customers.

But the pricing hiatus has not dampened China's appetite for iron-ore purchasing. If anything, it appears to have whetted it.

September saw China import an all-time-record of 64,7-million tons of iron-ore, which indicates that it is "business-as-usual" between Australia and China, despite their public ticktack.

"The Chinese are clearly still buying an awful lot of iron-ore from Australia", prompting iron-ore producer Rio Tinto to revise its guidance upwards by between 5% and 7,5%.

"In fact, one could say that, despite the verbal warfare, the Chinese are continuing to buy like crazy from the Australians," says an analyst.

Some analysts speculate, however, that China's abnormal buying spree may be aimed at strengthening its hand when the benchmark negotiations resume in earnest in January/February.

A sudden decrease in the hefty volume of imports at that point could force down the spot price and give China a stronger hand in the negotiation process.

"Whether that will turn out to be China's strategy or not remains to be seen, but 65-million tons in one month is phenomenal.

"If you go back a few months, people were saying that the iron-ore business would take years to recover, but a record 58-million tons was sold in July, and in September it went even higher.

"If the Chinese continue importing iron-ore at the rate they are, they could import as much as 650-million tons to 700-million tons of iron-ore this year, way ahead of last year," a spokesperson said.

China Iron and Steel Association (Cisa) has called for new pricing negotiations in a new timeframe, its secretary general Shan Shanghua wanting to change contract terms to the calendar year instead of the April-to-March fiscal year.

Shan tells Reuters that, six months into the contract year, benchmark talks are continuing with Brazil's Vale and Australia's BHP Billiton, but adds that China is not in talks with Rio Tinto.

Macquarie analyst Jim Lennon has expressed the view that China is likely eventually to agree to the benchmark deal set by Rio Tinto in order to secure future supply.

BHP Billiton's decision not to proceed with its iron-ore joint venture (JV) with Rio Tinto has been welcomed.

Most steelmakers objected to the marketing JV, which, to them, looked remarkably similar to a full takeover of Rio Tinto by BHP Billiton, to which the Japanese and the Europeans objected most strongly.

"It was always going to be funny, to have a marketing JV, and then to continue to be independent. Even though it has been cancelled, it's still going to be tricky.

"If you jointly produce, but market separately, the big issue is going to be whether or not you are going to be pumping production as much as you can under all circumstances, or whether or not you are you going to scale back when low demand requires that you scale back.

"That would mean that the two would jointly be making a very important decision that would impact on the overall market dynamics.

"What happens if BHP Billiton wants to continue to produce to full capacity and Rio Tinto wants to cut back? Would it mean that Rio Tinto would have to stockpile while BHP Billiton continued to produce?

"That would not work, because the whole system is geared towards blending in the port and they may not have the kind of stockpiling capacity to facilitate that.

"There was always going to be some tension and even though cancelling the marketing JV takes the chill out of the air, it's not erasing the concerns that steelmakers have," an analyst tells Mining Weekly Online.

Some analysts anticipate that the 47% of iron-ore that BHP Billiton has held out of benchmark pricing is likely to end up being sold at provisional prices. Rio Tinto settled in Japan at 32,95% below and Vale 28,2% down, representing a bit of a clawback from last year's trade differential, but Fortescue Metals Group (FMG) went in at 35% below.

Spot prices are from $85/t to $87/t. Deducting $10/t for transport from Australia to China reduces that to $75/t and $77/t, which is roughly 25% to 30% above the non-existent benchmark price, because subtracting 32,95% off last year's price leaves $60/t, which is roughly from 25% to 30% below the current free-on-board spot price of $75/t to $77/t.

Which is why many analysts are revising their iron-ore price forecasts upward, one saying that iron-ore prices will be 12,5% up in 2010 for fines and 17,5% for lump.

Most banking analysts are also lifting forecasts by between 10% and 20%, because the thinking is that a settlement may close the gap between the benchmark and the spot prices.

A UK publication says that the days of the benchmark system are numbered, arguing that the presence of spot prices and a forward curve - even though it does not extend very far - eliminates the need for a price discovery system, which the benchmark system offered.

BHP Billiton CEO Marius Kloppers has made no secret of his wish to abandon the 40-year-old benchmark pricing system, but some in the industry doubt that it will go away fast, pointing out that the Europeans and the Japanese continue to support it "very strongly", and it would seem that some of the Chinese steel mills also like it a lot.

"It's not going to disappear overnight at all; I think it's going to be around for a while," says a spokesperson.

South Africa-created diversified miner Anglo American, which expects to have the capacity to produce more than 150-million tons of iron ore a year by 2016, currently favours the benchmark pricing system.

Anglo's South African and Brazilian projects, which will provide that volume, are entrenching the company in the fourth position, ahead of FMG of Australia and behind the big three of Vale of Brazil and Rio Tinto and BHP Billiton of Australia.

South Africa's Kumba Iron Ore is currently slightly ahead of FMG, the pace of which is slowing following the collapse of its $6-billion deal with a Chinese company.

Iron-ore prices increased by 369% between 2003 and 2008.

Although Cisa has taken centre stage to curb prices, some believe that it will be Baosteel that will in the end exert the greatest price influence.

Cisa stepped in because the smaller Chinese steel mills felt that Baosteel got the good deal and was getting preferential volumes, leaving the smaller steel mills struggling to lock-in supplies and forcing them to buy at higher prices in the spot market.

But Cisa has been unable to get the benchmark price that it was seeking, and there is still absolutely no clarity on what will happen to Hu: "He's safely locked away and it's not clear that he is going to come out any time soon," says an analyst.

Against that background, some stayed away from this year's Cisa conference, because, in the words of one, "it's not the right time to be making waves, and drawing a lot of attention to yourself in China".

Meanwhile, on the iron-ore pricing front, there are now three price indices and improving liquidity in the indexed markets.

In September, BHP Billiton signed a nonbenchmark iron-ore contract – an eight-year, 22-million-ton supply agreement with South Korean steelmaker Hyundai Steel. It is understood that a portion of this is based on prices linked to an index and a portion on prices that will be adjusted quarterly.

"Certainly, BHP Billiton got what it wanted. It's not a benchmark price," an industry spokesperson says.

Supporters of the benchmark system object to steelmakers that treat the system as a call option, applying it when it suits them, and reverting to spot prices when they are more favourable. Benchmark supporters want its offtake provisions cast in stone.

On the growth front, BHP Billiton has made an offer for United Minerals Corporation (UMC), which is exploring the Pilbara of Western Australia for iron-ore and bauxite, an acquisition that would extend BHP Billiton's tenement area. The UMC tenements are along the railroad near Rio Tinto's West Angel iron-ore mine, as well Hope Downs.

Fairfax analyst John Meyer says that BHP Billiton is poised to use its better relations with China to steal a march on Rio Tinto, which has the Hu case hanging over it.

But Rio Tinto, Meyer adds, has substantially more iron-ore production and expansion potential as a result of acquiring Hope Downs some years ago from Gina Rinehart.

Meyer says further, however, that the strong Australian dollar is going to hold back profitability for both companies, but that Rio Tinto will benefit from its greater US dollar cost base.

A Goldman Sachs commentator says that BHP Billiton received a higher apparent realised price in the first half of the year than its rival Rio Tinto.

Evolution Securities analysts Charles Kernot and Louise Collinge describe Rio Tinto's share-price performance as stellar, and say that it is directly related to China's economic stimulus programme, which has had a direct knock-on effect on commodity demand and prices.

Cisa says that China's iron-ore imports have exceeded actual demand by about 50-million tons this year and that the oversupply leaves no room for further price rises.

Dow Jones reports that China is seeking a "China-specific" benchmark price and will not "blindly" take cues from term prices set by other Asian buyers.

The strains on the benchmark pricing system reportedly grew late last year when buyers, including China, opted for more spot deals during the global economic crisis, as spot prices fell below long-term contract prices.

The weakness in the price of high-quality iron-ore is expected to impact negatively on producers like Anglo and Ferrexpo. Anglo's Kumba produces lumpy ore and Ferrexpo produces pellets, the price of which is said to move in line with lump material.