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Australian Miner Shakes Up Iron Ore Price Structure

Mining giant BHP Billiton is changing the way it sells iron ore by setting prices quarterly instead of annually. Industry experts say this could anger Chinese steel mills, which have a voracious demand for the iron, and have been trying to negotiate discount prices.

For years iron ore, which is the key ingredient in steel production, has been primarily sold through annual contracts.

Anglo-Australia mining company BHP Billiton, one of the world's largest iron miners, now wants to set prices every three months, a move seen by industry analysts as a way for the company to take advantage of spiraling demand.

By setting prices quarterly, the company benefits if the spot market price suddenly soars. The spot price usually is far higher than the price for annual contracts and can rise or fall quickly.

But the move may anger some of BHP's clients, including Chinese steel makers. Last year, Chinese companies tried to negotiate a sharp discount in the annual contract price, arguing that the size of their purchases merited a lower price. The major mining companies, however, refused.

Resource market analyst James Wilson thinks BHP's move will upset China's steel makers.

"The Chinese are chasing the fixed price on an annualized basis," he said. "BHP has certainly been the champion of trying to change the system over the past few years and has basically adopted any new contract that has been signed is now signed on a, on a hybrid basis. Yes, certainly, it's certainly favoring the producers rather than the Chinese steel maker."

There is speculation that international steel prices will rise sharply as a result of changes to the iron ore price structure. That would make many household appliances and cars more expensive.

BHP Billiton sells more than 100 million tons of iron ore every year to steel mills in Asia and Europe as well as buyers in Australia.

The company's plan to introduce short-term pricing is the biggest change to the system in 40 years.

Rising demand for iron and other resources helped Australia largely avoid the worst effects of the global economic slowdown over the past two years. Much of that demand came from China, which not only needs iron for goods it exports but also for its own rapidly expanding construction industry.

Mining industry leaders indicate there is little chance that Australia's exports to China will be affected by the conviction of four executives for an Australian mining company in Shanghai. The men, one Australian and three Chinese citizens employed by Rio Tinto, were convicted of bribery and commercial spying and this week sentenced to prison.

The Australian government has criticized the handling of the case, because much of the trial was held in secret, and some China business analysts warn that it has alarmed many foreign businesses operating there.