Gas Week

EWN Publishing

Iron ore prices forecast to rise by between 20 per cent and 50 per cent after BHP abandons contract and goes for spot price, for new sales

Posted by gasweek on 11 October, 2007

Analysts predict iron ore prices to rise by between 20 per cent and 50 per cent — consensus estimates fall at about the 30 per cent mark. According to Michael Vaughan, in The Australian Financial Review, (4/10/2007), p. 15, BHP Billiton would be able to add more than $US500 million ($563 million) to its pretax profit by selling its additional iron ore production in 2007-08 on the spot market should it not convince customers to compensate it for the reduced freight costs of its iron ore.

BHP to sell non-contracted ore into spot: BHP Billiton’s president of marketing, Tom Schutte, said it had been discussing the freight differential with customers since it first broached the issue unsuccessfully in 2005. Schutte said BHP Billiton was working to address the freight differential and should it not reach a satisfactory outcome, it would start selling non-contracted ore into the spot market, where prices are now about double contracted prices.

All new ore above [2006-07] contracts spot: BHP Billiton was unwilling to force a change in the pricing of contracted tonnages that would expire in the next two to three years. “There was little indication that the freight differential will be tackled this year, except we believe all additional iron ore production above [2006-07] contracts will be spot,” Merrill’s Ms Binns said. “We calculate this could be about 10 million tonnes for BHP Billiton and could generate an additional $US520 million of pretax/royalty profit.” BHP Billiton produced roughly 100 million tonnes of iron ore in 2006-07 from its Pilbara operations, and expects an increase of about 10 million tonnes this year.

The Australian Financial Review, 4/10/2007, p. 15

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