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Rio Tinto follows iron ore rivals and kills off yearly prices

Rio Tinto has sounded the death knell for the 40-year-old practice of pricing iron ore through annual contracts, saying yesterday that it was following the world's other major producers by negotiating with steelmakers on the basis of quarterly agreements.

The group has been in talks with major Asian steel producers for weeks over a price for iron ore. Traditionally, mining companies have agreed annual benchmark prices, but after huge increases in demand over the last 18 months, market prices for the commodity have spiked, leaving the likes of Rio considerably out of pocket.

The largest mining groups, Rio, BHP Billiton and Brazil's Vale had tried to persuade steel mills to accept annual increases of close to 100 per cent, a move that steel producers, especially those in China, found unacceptable.

Two weeks ago, BHP and Vale said they had both agreed quarterly pricing deals. Vale, the world's biggest iron ore miner, said that it had struck a deal with Japan's Nippon Steel to sell the commodity at between $100 and $110 a tonne, for the next three months. The new price is about 90 per cent higher than the current annual benchmark level.

"Rio Tinto's position reflects the recent structural shift in the iron ore market away from benchmark pricing," said Sam Walsh, the group's iron ore chief executive. "It is in line with our recent comments that benchmark pricing only works if it reflects market fundamentals, otherwise the system would need to change."

The group refused to give details of any deals it had struck, or on what it considered an appropriate price. A spokesman added that that there was "no reason" why Rio was announcing the move a fortnight after its major rivals, saying that the companies are not in talks with each other.

Two weeks ago, Rio Tinto's former chief iron ore negotiator, Stern Hu, was jailed in China for 10 years after admitting taking bribes from steel producers. The company condemned Mr Hu, an Australian national, and his three Chinese colleagues, insisting that it was unaware of their crimes.

The move to quarterly pricing is a coup for the mining industry, but so far there is no indication that a deal has yet been done with any Chinese mills, the world's biggest steel producer.

Cisa, the organisation that represents Chinese steelmakers, has previously suggested that a price hike of just 20 per cent would be appropriate.

Last year, Vale struck a deal with a Japanese steel mill to increase prices by 33 per cent. The deal was rejected by the Chinese, who insisted on a 45 per cent discount to the 2008 settlement. Having reached no agreement, China bought iron ore from the open market, costing it billions of dollars.

China's biggest steel producers, most of which are state owned, have sent out mixed messages over scrapping benchmark pricing. He Wenbo, the chairman of Baosteel, the country's second biggest producer, said on 1 April that annual prices benefited both the steel groups and the miners. His comments contradicted those of Xu Lejiang, the head of Baosteel's state-owned parent, the Baoshan Iron and Steel Group, who said that the old system was ready for an overhaul.

Analysts argue that despite its strength, China will be forced to accept the new pricing regime.