Wednesday, May 19, 2010

Did BHP (NYSE:BHP), Rio Tinto (NYSE:RTP), Vale SA (NYSE:VALE) Iron Ore Pricing Strategy Backfire?

The quick change in the economic scene has put pressure on iron ore producers BHP Billiton (NYSE:BHP), Rio Tinto (NYSE:RTP) and Vale SA (NYSE:VALE), as the surety that the commodity bull market would continue on unabated could come back to haunt them.

While there is no doubt the commodity bull market will keep going, the corrections and probable short-term drop in demand could hurt the companies.

Some China observers think the three iron ore producers may have believed China would continue on with their double-digit annual economic growth, but I would be surprised if that was so, as many economists and China leaders have said they think it would be closer to the upper single digits.

With the growing inflation and housing market challenges growing, China is taking steps which could cut their annual economic growth in a way that could cause some short term pain to them.

Even a drop in growth of one or two percentage points in a country as large as China would have dramatic impact on the three companies.

The change in the way iron ore is priced is a good move over the long term, but in the short term, as we probably will soon see, it isn't as favorable to the businesses.

Iron ore pricing was recently changed from a benchmarking system of a year, to that of three months in most cases, and to a smaller degree - one month.

Even short-term this would and will benefit the iron ore miners, as long as prices continue to go up. If not, they're going to get hit hard by a fall in prices, which at this time is likely to happen.

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