Rio Tinto lends weight to calls for changes to iron ore pricing

RIO TINTO yesterday backed reform of the benchmark iron ore pricing system, joining BHP Billiton in predicting sweeping changes to one of the most important negotiations affecting the global economy.

“The benchmark has to evolve or it will break,” said Tom Albanese, Rio Tinto chief executive, as the mining company reported a 55 per cent drop in pretax profits in the half-year to June 30th.

Rio, the second largest iron ore producer, had been a backer of the benchmark system, in place since the 1960s, under which the first price agreed between a miner and steelmaker becomes a benchmark followed by the rest of the industry for 12 months. The shortcomings became apparent this year when China, the biggest steel producer, refused to accept Rio’s deal with Nippon Steel of Japan for a 33 per cent cut, instead asking for a 40-45 per cent discount.

This month the dispute escalated with the arrest of four Rio employees. But Rio revealed yesterday that pricing had moved beyond the benchmark by August, as it sold 50 per cent of its iron ore on the spot market in the first half.

The group’s 55 per cent drop in pre-tax profits from $9.82 billion (€6.9 billion) to $4.39 billion was less severe than for BHP Billiton, Anglo American, and Xstrata.

But at Rio, as for peers, drops across indicators reflected the night-and-day difference between metals demand in the first half of 2008 and 2009. Rio, which paid no interim dividend to cope with $39 billion in net debt, was hit by a depressed aluminium market.

Alcan, the unit whose $38 billion acquisition in 2007 created Rio’s debt burden, dropped to a loss of $206 million before interest, taxation, depreciation and amortisation, compared with an ebitda gain of $2.4 billion last time.

Cost-cutting, including the elimination of 16,000 jobs in the first half, would mostly be apparent in the second half, Mr Albanese said.

Interim earnings per share fell from $4.40 to $1.55. Revenues from continuing operations fell from $27.2 billion to $18.8 billion.

Shares in Rio rose 1 per cent. – (Copyright The Financial Times Limited 2009)