Billiton winning pricing war

MELBOURNE: Marius Kloppers, chief executive of BHP Billiton, is winning his war on how the steel industry buys its raw materials.

BHP, the world's biggest mining company, agreed last week to a coking-coal supply agreement with Japan's JFE Holdings, the first accord that will run for three months. Most coking coal is supplied on year-long contracts based on a fixed price.

Melbourne-based BHP is seeking deals that cover shorter periods and plans the same for the larger iron ore market as prices of both commodities climb on Chinese demand.

"It's just a more sensible way of doing business and Kloppers sees that," said Neil Goodwill, an analyst in Melbourne at Goldman Sachs JBWere. "Recent history will show you a lot of value has been lost by using the contract system."

BHP, Rio Tinto and Fortescue Metals, which mine iron ore in Western Australia, may be missing out on about US$20 billion (29 billion) of sales a year by selling at benchmark contract prices instead of cash prices, Goodwill said in a March 1 report. The cash, or spot, price paid by Chinese steel mills has doubled in the past year.

"If you have a more frequent readjustment of price, that is more reflective of the market," said David Flanagan, managing director of Atlas Iron, an Australian iron ore producer.

Atlas said on Wednesday it would start selling ore to Asian steelmakers using a mixture of cash and benchmark prices.

Kloppers' goal is to get customers to pay for coking coal and iron ore according to a constantly shifting price index, said Tom Price, a commodity analyst at UBS in Sydney.

BHP also produces copper, oil, aluminum and silver, which are sold at market prices.

- BLOOMBERG