Doesn't BHP Billiton Benefit More From its Proposed Pricing Index Than Either CVRD or Rio Tinto?

Implications: BHP Billiton is geographically the closest supplier to China of iron ore. BHP wants the 2008 price for its iron ore to be indexed to the Cinese spot market. Who would benefit most from this "first step,' perhaps, towards an exchange traded iron ore contract? I think not.

Analysis: BHP is telling its customers that all market participants will benefit from a transparent indexing schema whereby its, producer's, selling price can be linked to pricing in the customer's spot market.

This doesn't seem to be true, because, in fact, spot sellers and buyers may well use a CIF price. This means that the price to the buyer, at his port of entry or his port of delivery, will include the insurance and 'freight' costs. Therefore even if the ore from BHP (Australia), CVRD (Brazil) and Rio Tinto (Canada or other western hemisphere mine origins) were to be the same cost, FOB, origin, the CIF price for BHP would always be more profitable to the seller, because it includes less freight and insurance costs.

This, of course,  assumes that the CIF price for all three 'majors' is the same to the customer at any given point. For BHP this is always the best deal, and it gives them the leverage to lower their price if necessary without seeming to break with the others on the price, FOB, mine.

I think that the iron ore selling business is far from wanting to set up an exchange traded futures contract for iron ore.

What is happening is that the strengthening Australian dollar, GBP, and Brazilian Real is worrisome to the big three of iron ore, and BHP, for one, is trying to give itself some wiggle room in case China should decide to downplay or even decouple from the sliding US dollar.

I don't know what currencies the Chinese use to pay for iron ore from their suppliers but look to not only a price index based on spot prices but also based on currencies other than the US dollar to become standard around the world.

American steel mills that now import from Canada are already feeling the pinch caused by the US dollars devaluation against the Canadian dollar.

Rio Tinto is even now negotiating to develop more domestic iron ore production inside the US to combat foreign exchange problems there and the potential loss of US markets to domestic suppliers whose costs are in US dollars.

The iron ore market is "a changin" as Bob Dylan might say.