Update BHP Billiton
On January 20 BHP Billiton (BHP) announced that second-quarter iron ore output rose 11% to a new record on heavy demand from China. The company also reported increased production of petroleum, zinc, diamonds, and nickel. Production of coking coal, uranium, and copper declined.
Continuing the shift in how prices are set on the global iron ore market, BHP Billiton said that 46% of its iron ore shipments from Western Australia were sold at market rates. Prior to the breakdown of negotiations between iron ore producers and China in 2009, most ore was sold at prices determined during annual negotiations for annual contracts between the producers and steel makers in Japan, Korea, and China. In July the company reported that 30% of its iron ore production was at market rates. In 2009 market spot prices for iron ore averaged 90% above the $61 a metric ton negotiated with Japanese and Korean steelmakers for 2009-2010.
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So in other words, expect iron ore prices and profits to plummet in the next few quarters as China quits stockpiling resources and buying so much on the open market.
or the producers will be take a harder line on annual contract pricing with the chinese. Rio recently took the position it was unwilling to negotiate a rate for China that was lower than the annual contract rate it had agreed to with Korean and Japanese steel companies. I think the CEO’s comment was “they can come to Australia if they want to talk.” That’s hardly surprising given the arrest last year of Rio’s chief negotiator when RTP refused to accede to China’s pricing demands.
I’m siding w/ Chapmame on this one. As China stops flooding their mkts w/ free cash and the spendthrift days are over…they will come to an agreement. Only thing I can think is that China is doing this on purpose b/c they can afford it and other countries who are in much worse position have to cough up more $$$ at a time when they can least afford it, but need the ore, etc.
I can’t fathom why China wouldn’t negot. already since they know they need the materials…and yes, I did read Jim’s synopsis as to why it happened…and I’m sure BHP is more than happy to put the screws to them.
Story a little different but not new. I hope China has some success in slowing their growth but the Chinese people must realize the necessity of moderation or there will be more strain between govt and population. I think they are smart enough to negotiate a better deal if they could just drop the attitude. Maybe that is part of the meaning “developing”.
I’m lacking Vale as a bette play here. I sold 1/2 my BHP position for 1/2 in vale. I agree with Jim’s analysis that profits will be declining in these areas. The only area I see with real 2010 excitement is TC
We seem to forget that we have a Domestic steel industry here in the US. Where would CLF fall in this since it supplies mostly the Domestic players
Jim,
I noticed that you didn’t change your price target, or give any personal insight into this market. This seems like a deliberate change from your past blogs.
I am wondering if you are not taking a position until it becomes more clear how China will react to the challenges they currently face ?
No new loans to Agriculture company’s without specific and direct OK from China government, how will this affect Potash?
Faced with quickly rising Iron ore prices, do you suppose the Chinese Government is not far behind on mandating no new loans for steel companies as well?
Where do you stand on these “recent” developments?
p.s. Inquiring minds want to know….
Interesting article in SJ Mercury News on lithium mining contract associated with Toyota.
http://www.mercurynews.com/business/ci_14229852