BHP still has iron ore pricing power despite discounts, RBC says

BHP Group’s iron ore discounts following Chinese pressure are “optical, temporary and economically bounded” and don’t reflect a decline in the mining giant’s pricing power, according to RBC Capital Markets.

The world’s largest mining company is deliberately absorbing the discounts to protect pricing, analyst Kaan Peker wrote in a research note, adding the real risk would be benchmark fragmentation. By holding the line on index structure, BHP is preserving long-term value, he said.

BHP has been in a months-long dispute with state-owned trader China Mineral Resources Group Co., which has sought to curb steels mills’ purchases from the miner as part of a broader effort to increase the country’s negotiating clout. BHP said on Tuesday it had seen some impact, and that it had responded by being more flexible with iron ore shipments.

The miner’s Jimblebar iron ore fines are trading at a discount of 9% to 10% to the index, and could see a floor of 12% to 15%, Peker wrote in the note dated Jan. 19. Mill productivity losses and substitution dynamics will limit further widening, he said. MAC fines are at a moderate discount around 4% to 7%, while Rio Tinto Group’s Pilbara Blend are around parity to a slight discount.

Iron ore futures on the Singapore Exchange fell 0.9% to $103.70 a ton at 10:57 a.m. local time, down for a sixth session. Futures on the Dalian Exchange and Shanghai steel contracts also declined.

(By Katharine Gemmell)