THe following is an extract from a uk news letter i sub to, from todays.I hold more than a few of these so am preety keen to see it go
Mineweb.com: BHP and Rio both to push for freight premium for Aussie iron ore shipments to China - Thanks to a subscriber for this article from Mineweb by Lawrence Williams which highlights a potential bonus for BHP Billiton and Rio Tinto if they succeed in their negotiations with the Chinese on iron ore pricing for the next year. Here is the article in full.
Reports from good sources in Australia suggest that this year BHP Billiton and Rio Tinto will both demand premium prices for their iron ore shipments to China based on the freight cost differential between iron ore shipments from Brazil and those from Australia. If these differentials can be negotiated with the Chinese, then the effective price increase for Australian shipments could be as much as around 20 percent over and above whatever other price increase the miners might receive.
Currently China receives the vast bulk of the iron ore shipments necessary to feed its ever growing steel industry from Australia and Brazil, with BHP Billiton and Rio Tinto dominating the Australian deliveries and CVRD those from Brazil. In effect, the Chinese are currently paying considerably more fro Brazilian output, even though the fob iron ore prices are the same. The balance is made up from the freight cost differential because of the extremely long shipping route from Brazil.
BHP Billiton has raised this possibility in previous negotiations with the Chinese (and Japanese) steel mills, but this idea had been thrown out by the mills and without a stand from Rio Tinto on the same issue, BHPB had to concede.
Mineweb did touch on this issue in the article 'Forget gold and base metals
- iron ore may be the place to be' but the latest reports from Australia that the two mega companies will probably both take a similar approach makes the whole scenario more likely.
If the Chinese agree reluctantly to a landed price for iron ore equivalent to the landed price of Brazilian material, analysts feel that the effective price increase likely to be achieved by the Australian miners would be 50 percent or more, which would make a huge impact on profits even for the big diversified companies. If such a price increase flows through to the smaller iron ore mining companies, where iron ore may be their main product, then the impact on profits, and on share prices, could be enormous.
Chinese steel mills, which have seen iron ore prices rise dramatically over the past few years, have been the victims of their own success as it has been their demand which has led to the iron ore price increases. With their appetite for iron ore seemingly unstoppable short of a huge worldwide recession, the outlook for iron ore producers remains among the best for any metal.
My view - I do not believe that this eventuality has been priced into the shares of Rio Tinto (RTP in the USA) and BHP Billiton because it seems like such a long shot. However these companies along with CVRD have succeeded in negotiating significant price increases in the last three years so they may be able to pull this off. If they can, the resulting jump in company profits will swiftly be reflected in the share's prices.