BHP and Rio Tinto's Chinese contracts at risk

The contracts with China of iron ore giants BHP Billiton and Rio Tinto are at risk after reports in the media that Chinese steel companies would like to terminate 2008 agreements three months earlier than scheduled.

Reuters reported that stress levels ran high at the 2009 iron ore price negotiations after the China Iron and Steel Association asked for the 2009 contracts to commence in January 2009 instead of April 2009, ostensibly as Chinese companies use the calender year as their fiscal year.

Earlier, reports in the London-based Steel Business Briefing had cited unnamed sources that it said were close to the China Iron and Steel Association (CISA) as saying that the association wanted to terminate its 2008 contracts with BHP and Rio three months ahead of schedule.

The foreclosure of the contracts would be to the advantage of China's steel companies who have been subject to huge cost escalations in the price of iron ore. They are now aiming at turning the tables on the miners, pressuring BHP and Rio Tinto at a time when commodity prices continue to fall.

Most of Rio and BHP's iron ore contracts start on 1 April. Earlier in the year, BHP and Rio Tinto had successfully completed negotiations that saw a weighted average increase of 86 per cent with Chinese steelmaker Baosteel for iron ore benchmark contract prices. Reports at the time quoted analysts as having estimated the outcome of the price increase being responsible for the addition of $900 million to Rio's net profit and $500 million to that of BHP's during the current financial year.

China has announced that during the next round of negotiations, will will aim at unified iron ore prices from Brazil, Australia and India for the 2009 contract benchmark. Negotiations are presently in the initial stages. Rumours were rife with speculation that Chinese steel would not be able to afford shipments during the first quarter of 2009 under the 2008 benchmark prices.