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Vale and BHP in historic iron ore price move

Miners and steel groups agree to scrap annual pricing after decades

BHP Billiton and the Brazilian mining giant Vale signalled an end to the decades-old practice of setting an annual iron ore benchmark price yesterday after agreeing to short-term deals with several Asian steel makers.

Vale, the world's biggest iron ore producer, said yesterday that it had reached an agreement with Japan's Nippon Steel to sell the commodity at between $100 (£66) and $110 (£73) a ton, for the next three months. The new price is about 90 per cent higher than the current annual benchmark level. The move is a victory for the miners who lost out last year when iron ore prices spiked after a benchmark deal was agreed.

Marius Kloppers, BHP Billiton's chief executive, said last month that the spot price should form the basis of the negotiations and that it is now "very close to 100 per cent above where the benchmark price is today".

BHP confirmed yesterday that it has also moved away from the benchmark pricing system, for the vast majority of its customers, and that "the structural change that these settlements represent is consistent with BHP Billiton achieving market-clearing prices". The company refused to give details of specific deals, but sources said that it had reached a number of settlements.

"A momentous day," said Brendan Harris of Macquarie Bank. "It's not every day that the pricing terms for one of the core commodities in world trade change. BHP Billiton's announcement suggests that we are unequivocally in a transitional phase, which sounds the death knell of the old benchmark system. Importantly, such an announcement suggests the producers are set to capture the significant differential that exists between last year's benchmark and current spot rate."

The three biggest iron ore producers, Vale, BHP and Rio Tinto, have been vocal in calling for a different settlement on iron ore prices. In the past, once one benchmark deal had been reached, the parties accepted the agreed price. However, Rio Tinto refused to comment on the announcements made by BHP and Vale yesterday, indicating that it has not yet reached deals with its customers.

BHP declined to say if any of the deals included Chinese steel mills. 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. After no agreement was reached, China bought iron ore from the spot market, costing it billions of dollars.

Talks with Chinese mills have taken place against the backdrop of the trial of four Rio Tinto employees who were convicted on Monday of commercial espionage and taking bribes.

However, analysts said yesterday that China, the world's largest steel maker, was likely to accept the changes: "The whole move away from benchmarking is China-driven and, yes, China will fall into line," said Jim Lennon of Macquarie Bank.