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July 1, 2009

THE decades-old benchmark system for setting the price of iron ore looks to be on its last legs with no agreement expected by last night’s deadline between major producers and Chinese steel mills, as reported in the Herald yesterday.

Rio Tinto and BHP Billiton had until midnight last night to reach an agreement or risk moving to volatile spot prices for its customers.

It would be the first time in the 42-year history of the benchmark system that no agreement has been reached by July 1.

“I think there is definitely going to be a move away from the benchmark towards spot pricing and index pricing,” said a Fat Prophets mining analyst, Gavin Wendt.

The move may play into the hands of BHP Billiton, which has said the benchmark system should go.

Rio Tinto confirmed that some contracts may revert to spot market pricing today as China’s steelmakers argue for a deeper cut than its Asian rivals agreed.

A Rio spokesman, Gervase Greene, said talks were continuing: “Rio has long been a supporter of the benchmark system but if customers choose to buy on the spot market instead they will.”

China overtook Japan as the biggest buyer of iron ore in 2003. Until then, benchmark prices had usually been set by Japanese or European steel makers.

Although other Asian steel makers have accepted new benchmark prices, mills in the world’s largest iron ore market – China – have held out for a better deal.

Benchmark agreements settled by Rio Tinto included a 33 per cent cut to last year’s prices. The Chinese mills are insisting on reductions of 40 to 45 per cent.

Mr Wendt said the Chinese risked being left short of supply unless they signed a deal, especially if demand picked up in Europe.

“It is a high-risk strategy for sure. They are trying to play this game of brinkmanship,” Mr Wendt said. “They are trying to stare down Rio, and Rio isn’t blinking.”

The Brazilian producer Vale has been waiting for Australian miners to settle contract prices before concluding its own agreements. It has agreed to cut prices by 28 per cent for ArcelorMittal.

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