By V. Phani Kumar, MarketWatch
HONG KONG (MarketWatch) -- The outlook for Australian mining majors Rio Tinto Ltd. and BHP Billiton Ltd., along with those of other iron-ore producers, has brightened with predictions that ore prices are set for a major increase.
Shares of Rio Tinto and BHP provided support to the Sydney market Thursday after a Chinese newspaper reported the two mining giants, along with Brazilian peer Vale SA /quotes/comstock/13*!vale/quotes/nls/vale (VALE 27.56, -0.22, -0.79%) , were demanding a 50% increase in long-term contract iron-ore prices for this year. See report on ore-price demand.
The negotiations are expected to be crucial for the miners as well as for the Chinese steel industry, as talks between the groups failed to reach an agreement last year after the China's steel association demanded a higher discount over 2008 iron-ore prices than those already agreed to by South Korean and Japanese companies.
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The failed talks forced Chinese steel mills to either meet most of their iron-ore needs through the spot market last year, or sign individual contracts to buy iron ore at a higher price.
Analysts are similarly forecasting a positive outlook for iron-ore prices this year after strong demand conditions boosted prices over the last several months, with some saying the miners have an edge in the price negotiations.
Morgan Stanley analysts led by Craig Campbell wrote in a report this week that they expect a 60% jump in the iron-ore benchmark price index this year, with spot prices of the mineral averaging $127 a ton.
"We are assuming BHP Billiton [will] roll most of its Chinese customers onto index-linked prices. We understand [BHP] is likely to revoke contracts that have expired due to Chinese steel mills failing to sign new prices in 2009 by the drop-dead date embedded in supply contracts," the brokerage said.
The analysts said BHP is leading a change in the way bulk commodities are priced, by "moving away from the annual benchmark price system to ... a spot market that daily sets a clearing price."
They said that spot and iron ore index-linked prices are also more suited to the Chinese customers.
Shares of Chinese steel mills have vastly underperformed the benchmark Shanghai Composite index so far this year. In contrast, Australian miners have marginally outperformed the benchmark Sydney index.
In Thursday's trading, shares of Rio Tinto /quotes/comstock/13*!rtp/quotes/nls/rtp (RTP 52.38, -0.01, -0.02%) /quotes/comstock/22x!e:rio (AU:RIO 70.72, -0.78, -1.09%) climbed 0.5% and BHP Billiton /quotes/comstock/13*!bhp/quotes/nls/bhp (BHP 72.40, +0.32, +0.44%) /quotes/comstock/22x!e:bhp (AU:BHP 40.19, -0.27, -0.67%) added 1.1%, while Fortescue Metals Group Ltd. /quotes/comstock/22x!e:fmg (AU:FMG 4.32, -0.02, -0.46%) /quotes/comstock/11i!fsumf (FSUMF 3.81, -0.02, -0.52%) rose 1.2% in Sydney afternoon trading, while the benchmark S&P/ASX 200 was flat at 4,735.70.
The China Daily also reported that Hebei Iron & Steel Group is calling for a a national iron ore company be formed to centralize imports and improve bargaining power. See full China Daily report.
But Dow Jones Newswires reported Wednesday that the former chairwoman of Baosteel Group Corp. had sharply criticized the proposal as creating a monopoly and violating trade rules.
In Shanghai trading Thursday, shares of Baoshan Iron & Steel Co. /quotes/comstock/28c!e:600019 (CN:600019 6.55, 0.00, 0.00%) slipped 0.2% and Maanshan Iron & Steel Co. /quotes/comstock/28c!e:600808 (CN:600808 3.63, 0.00, 0.00%) /quotes/comstock/11i!maanf (MAANF 0.53, +0.03, +6.00%) dropped 1.4%.
Angang Steel Co. /quotes/comstock/28b!e:000898 (CN:000898 8.80, 0.00, 0.00%) /quotes/comstock/11i!angg.y (ANGGY 56.59, +4.94, +9.56%) dropped 1.9% in Shenzhen.
In broader markets, the Shanghai Composite gave up 1% to 3,064.76, Hong Kong's Hang Seng Index fell 0.5%, Japan's Nikkei 225 lost 0.3% and India's Sensex slid 0.1% to 16,988.45.
Varahabhotla Phani Kumar is a reporter in MarketWatch's Hong Kong bureau.
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