Steelmakers throughout Asia cringed earlier this week when they heard the news that Aussie mining giant Rio Tinto PLC (ADR: RTP) had secured a 97% price increase for its iron-ore. But getting Rio out of the way was only half the battle, because now steelmakers are forced to confront BHP Billiton Ltd. (ADR: BHP) and its chief executive, Marius Kloppers, who may not be so easily placated.

It was Kloppers who first launched the campaign to charge Asian steelmakers a freight premium based on Australia’s proximity to the market. At the time, Kloppers was just the chief commercial officer at BHP and lacked enough clout to drum up support for his plan. But as the price of iron ore escalated, Rio Tinto came around and backed Kloppers’ play this year, forcing Chinese steelmakers to pay the a convenience premium for Australian ore.

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Monday, Rio and Baosteel Group Corp., China’s largest steelmaker, announced they had reached an agreement to raise iron-ore contract prices by 80% to 97%. That bested Brazil’s Vale (ADR: RIO) which earlier secured a 70% increase for the price of its ore. It was the first time Chinese buyers ever agreed to pay more for Australian ore than supplies from Brazil.

Many analysts believe it’s only a matter of time before BHP follows suit and signs on to the same 97% price increase obtained by Rio. But not everyone is so sure.

Recent remarks from BHP executives have indicated that the company isn’t satisfied with the increase, and may hold out for more.

"We are delighted to see that progress," Marcus Randolph, chief executive officer of the ferrous and coal units of BHP, said Monday at a presentation in London. "It doesn’t cover the full $40 to 50 difference on freight."

"The freight differential has been $55 to $60, while their settlement implies a premium for freight of a little under $7.50. It’s an improvement but it hasn’t closed the gap," Randolph said.

Aside from a higher freight premium, BHP is seeking to abolish annual contracts entirely and shift to a system based on spot prices.

"The beauty of an index is that it doesn’t result from a wrestling match between buyer and seller about what’s fair," Randolph said. "It actually results from a large number of trades that occur between independent parties."

However, the Asian steelmakers negotiating with BHP don’t seem inclined to give up anymore than they already have.

"There are big differences between what we want and what they are requesting," South Korea’s Posco (ADR: PKX) said earlier this week referring to negotiations with BHP.

One official familiar with the talks recently told Bloomberg News that any attempt by BHP to link contract prices to higher spot prices would be rejected.

While neither party would like this standoff to last a moment longer than it has to, it seems clear that BHP will not be satisfied to merely accept terms equal to those agreed on by rival Rio Tinto.

News and Related Story Links:

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• Bloomberg:
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• Financial Times:
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• Herald Sun:
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• Bloomberg:
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• Financial Times:
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• Money Morning:
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Rio Tinto PLC (RTP), the world’s second-largest iron ore producer, indicated that it was not satisfied with the 65% increase in the benchmark ore price settled on by Brazil’s Vale (RIO), the International Herald Tribune reported.

Traditionally, world iron ore prices have followed the annual benchmarks established by one of the three leading iron ore producers – Vale, Rio Tinto, and BHP Billiton Ltd. (BHP) – in their negotiations with major global consumers.

This year, Vale took the lead, negotiating deals with Nippon Steel Corp. of Japan, and South Korea’s Posco (PKX) that allowed for a 65% increase in the price of Itabira ore, and a 71% increase in the price of its higher quality Carajas ore. The contracts will go into effect April 1.

But Rio Tinto, which reportedly produced a company record 145 million tons of iron ore last year, thinks it can do better.

"The group is seeking further customer clarification about the settlements, and in particular the settlement over Carajas ore, which is the relevant reference ore for Rio Tinto products," Sam Walsh, chief executive of the company’s iron ore projects said in a statement. 

Rio Tinto, an Australia-listed company, believes its proximity to Asian markets gives it greater leverage to charge higher prices.

"Rio Tinto will continue to negotiate to obtain a freight premium, to reflect its proximity to Asia and its major customers," Walsh said.

Freight accounts for 30% of the landed cost of Australian iron ore in China, but close to 50% of Brazilin iron ore, according to IHT. China, the world’s largest steel producer and consumer, imported 383 million metric tons of iron ore in 2007, up 56.8 million tons, or 17.4%, from the previous year, according to the China Iron and Steel Association.

A boom in commodity prices caused the spot price of iron ore to triple in the past five years. While benchmark iron ore prices are currently just $60 a ton, the spot price of iron ore is just under $200 a ton.

News and Related Story Links:

• International Herald Tribune:
  Rio Tinto balks at benchmark ore price deal

• Money Morning:
  Mining Companies Stock Up On Iron Ore Assets