BHP reaps rewards of spot market surge
The fruits of Marius Kloppers’ crusade for shorter-term prices for iron ore were clear in BHP Billiton’s first-half results published last week. The group’s underlying profits were up 59.7% year-on-year at $17.3 billion for the second half of 2010, but iron ore ebit was up 178%. Iron ore’s share of earnings rose from below one quarter to nearly 40% of earnings, as BHP shifted nearly all sales to more lucrative index-linked or spot prices.
The fruits of Marius Kloppers’ crusade for shorter-term prices for iron ore were clear in BHP Billiton’s first-half results published last week.
The group’s underlying profits were up 59.7% year-on-year at $17.3 billion for the second half of 2010, but iron ore ebit was up 178%.
Iron ore’s share of earnings rose from below one-quarter to nearly 40% of earnings, as BHP shifted nearly all sales to more lucrative index-linked or spot prices.
Kloppers said in a conference call he was “comfortable that the price-of-day concept is cemented”, and predicted an expansion of the spot market this year. “Within the next twelve months we’re going to see a greater visible-physical-traded spot market in iron ore, and we’re trying to facilitate that,” he said.
Spot iron ore prices last week were within a whisker of the record $200 per tonne cfr China, giving BHP and other miners a strong rationale for a further squeeze on the pricing periods.
In China, BHP has now all but abandoned quarterly contracts and is now selling almost exclusively on a monthly, spot or some other short-term basis, according to various sources in China.
And in one case, its monthly contracts are to be settled against indices in the current month, rather than any previous period.
“BHP is selling contracted iron ore based on current-month spot indices. We pay a provisional price at the beginning of the month, and then make up the difference at the end,” a source at one of China’s biggest steelmakers said.
January contracts were settled at around $175 per tonne cfr for 62% Fe fines, and February contracts are expected to surpass $180 per tonne cfr China, the source said.
Vale and Rio are taking a more conservative approach, sticking to quarterly contracts, for which prices seem set to rise by about 20% for the second quarter.
This adds up to the miners enjoying an iron ore bonanza – for now.
But because this stems from the paradigm shift away from annual contracts and the hike in prices since the third quarter of 2010 there are doubts about whether or for how long prices can be sustained at these levels.
There are signs that the $200 per tonne figure is again provoking some serious psychological resistance by spot buyers – particularly because the Chinese steel market shows signs of softening.
Shanghai rebar has fallen 2.7% on its level before the Chinese New Year, while spot hot rolled coil has slipped by 1%.
Leading steelmakers have raised March exw prices, but that decision could yet prove to be badly timed, given the shift in sentiment on the spot market.
The introduction of new regulations governing the housing market in China, and expectations of tighter lending rules, have added to the sense that the Chinese economy is likely to grow less strongly this year.
“We are cautious about the outlook for steel. New regulations on the property market in Beijing could spread to other major cities,” the manager at one steel mill in northern China said.
“If that happens, the whole Chinese housing market will be hit and there will be much less demand from the construction sector.”
The OTC iron ore market sensed the shift last week, with contracts for March settlement dropping to $175 per tonne cfr Qingdao, down $8 on the previous day.
“The first bit of negative news on SHFE rebar was all it needed,” one broker said.
“Buyers are stepping back as everyone is nervous,” said a second broker.
Swaps tied to deliveries in the second quarter of 2011 were bid at $157 and offered at $160.
If iron ore prices retreat from their current heights, it will be happening at a time of significant cost inflation, amid tight markets for labour and equipment in the mining industry.
There was anger in Australia last week, as BHP Billiton’s bumper profits coincided with the revelation that the government’s watered-down mining tax would bring in much lower revenue than planned.