Wednesday July 1, 05:52 AM
Australia, China iron ore talks collapse
By Talek Harris
SYDNEY (AFP) - Australian producers and Chinese buyers have missed a deadline to set benchmark iron ore prices, signalling the end of a 42-year-old system and risking new friction between the key trading partners.
Anglo-Australian mining giant Rio Tinto (LSE: RIO.L - news) , which spearheaded the negotiations, refused to comment on whether talks would continue after the overnight deadline expired but said customers were free to buy at spot prices.
"If they choose to buy ore on the spot market, then they will," company spokesman Gervase Greene told AFP.
"Our position hasn't changed, which is while we prefer the benchmark system, it's always a matter for customers. If they prefer the spot market, then they will (use it)."
Talks had deadlocked on Chinese demands for deeper cuts than the 33-44 percent negotiated with Japan and South Korea on the benchmark, which sets ore contract prices over the coming year.
China, Australia's biggest iron ore customer, had reportedly called for 40-45 percent reduction, reflecting its growing influence in the market and increased volatility caused by the global financial crisis.
Analysts said Beijing was still smarting from last year's sharp rise in the benchmark price, while negotiations may have been further clouded by Rio's decision this month to walk away from a massive Chinese cash injection.
"It's a very important line in the sand for them," said Tim Schroeders of Pergana Capital. "They're showing they're not patsies, they're serious players when it comes to negotiations and they aren't just going to roll over."
The breakdown could destabilise the market with producers finding it harder to plan capital expenditure and buyers exposed to fluctuations in price.
However, some experts say the benchmark system has long been doomed since iron ore became more widely available and was bought by a greater number of countries, leading to a boom in the spot market.
Despite reports from China that the talks could continue, BHP Billiton (LSE: BLT.L - news) , the world's biggest miner, is known to favour an index pricing system while shorter-term contracts would also help buyers be flexible.
"It's probably indicative that the old benchmark pricing system may have run its race," Schroeders said. "The most likely scenario is a combination of any of those types of price scenarios in a new pricing system."
Other media reports said Chinese steel mills were already circumventing the talks by agreeing to pay benchmark rates as spot prices soar.
Beijing-based metals consultancy Umetal, quoted by Dow Jones Newswires, said Chinese spot prices hit 92 US dollars per metric ton this week, well above the 75-76 dollars which would have been set by the Japanese and Korean benchmarks.
"If the spot price rises they're forced to pay more than the benchmark negotiated with the Japanese -- that's a big 'if' but it's the risk they run," Schroeders said.
Rio Tinto's Australian-listed shares were down 2.5 percent early on Wednesday while BHP Billiton dropped 2.3 percent.
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