Rio Still Selling Spot Iron Ore Despite Price Drop

Global iron-ore supplier Rio Tinto Ltd will continue to sell ore into spot markets despite a dramatic drop in prices, a company spokesman said, reflecting a resolve to overhaul the way big miners sell ore.

Rio, the world's second-largest iron ore miner, and close rival BHP Billiton have led drives to disband fixed pricing of iron ore in favour of market-driven spot sales, but their efforts have so far been unsuccessful.

Rio has already sold almost 10 million tons of ore at spot so far in 2008, its first year of spot sales, with plans to sell about 5 million tons more by the end of December, he said.

"We expect to sell up to 15 million tons on the spot market this calendar year," spokesman Gervase Greene said on Thursday.

The price of Indian iron ore sold on the spot market in China - a key indicator - is around $95-$100 a ton, CFR (cost and freight), which is below the benchmark contract price for similar quality Brazilian and Australian ore. Spot ore sold for up to $200 a ton in some Chinese ports in March.

Rio chief executive Tom Albanese told a meeting of mining executives in Melbourne last week his company was fortunate to have sold so much of its ore into the spot market while prices had been riding high.

Until this year, Rio, which expects to mine almost 200 million tons of ore this year, sold all its ore at annually fixed prices.

Contract iron ore prices are set each year by the big three mining companies - Vale, Rio and BHP - in closed negotiations with big steel producers in China, Europe and Japan.

But the sharp rise earlier this year in spot prices, as Chinese steel mills lapped up more ore from third parties in a bid to wield more influence over big miners, prompted Rio to allocate ore for spot sales.

Rio and other miners have since secured contract price rises of 96.5% for iron ore lumps and a 79.88% for fines.

"The spot market is nowhere near what it was when Rio entered it," said James Wilson, an analyst for DJ Carmichael & Co.

China's appetite for imported ore is also showing other signs of waning as mills cut production and inventories pile up, according to Wilson.

"We're seeing demand ease, as least temporarily, which you would think is due at least in part to the financial crisis spreading around the world," Wilson said.

Earlier on Thursday, Australia's fourth largest iron ore miner, Mt. Gibson Iron Ltd, said it was asked by a number of customers in China to postpone this quarter's deliveries, citing economic uncertainties and tight credit that have led to a major build-up of unused ore at Chinese ports.

Rio, which sells millions of tons of ore to China annually, was running normal deliveries, according to the spokesman.

Chinese steel makers have already agreed to cut production by up to 20%, perhaps until year-end, in hopes of arresting falling steel prices.

Shougang Group, Hebei Iron & Steel Group, Anyang Iron & Steel and Shandong Iron & Steel, state-owned firms that produce nearly a fifth of China's steel, agreed this week to cut output by 10-20%, Reuters reported on Wednesday.

by James Regan, Reuters.