Deal fails to quell iron ore pricing questions: John Kemp

-- John Kemp is a Reuters columnist. The views expressed are his own --

By John Kemp

LONDON (Reuters) - Rio Tinto's agreement to cut the iron ore prices charged to Japanese and South Korean steelmakers 33 percent for the year starting April 2009 has averted an immediate breakdown in the benchmark pricing system. But it amounts to a stay of execution rather than a reprieve.

With only lukewarm support from the major Australian producers, the future for the benchmark system remains unresolved. Rather than a formal breakdown, it seems much more likely the system will continue its recent evolution toward a mixture of benchmark deals and contracts linked to the emerging OTC swap market.

Traditional pricing was based around long-term framework contracts between steelmakers and the three major mining companies (Rio (RIO.L: Quote, Profile, Research)(RIO.AX: Quote, Profile, Research), BHP Billiton (BLT.L: Quote, Profile, Research)(BHP.AX: Quote, Profile, Research) and Vale (VALE5.SA: Quote, Profile, Research)) for the supply of ore, with annual negotiations to settle prices for twelve-month periods.

Negotiations commence the previous summer with the aim of concluding a deal before new prices are scheduled to take effect on April 1. If there is no agreement, the framework contracts provide for deliveries to continue at prior year prices for a further three months, with changes backdated to April.

While the system has served the industry well, it has come under increasing pressure from both consumers and producers in the last five years.

Swingeing increases between 2004 and 2008 triggered fierce protests from steelmakers, especially in China, about market dominance of the big three.

Meanwhile, Australia's producers have complained benchmark settlements do not reflect the "superior value" of their product in China (in terms of quality and shorter, cheaper shipping costs).