Rio Iron Ore Deal May Sink BHP Price Plan: Analysts

Miner BHP Billiton may be forced to scrap its plan to rewrite the way billions of dollars of iron ore are sold every year after rival Rio Tinto struck a benchmark deal with China, analysts said on Tuesday.

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Rio agreed a near-doubling of iron ore prices with China's biggest steel-maker, Baosteel, on Monday. BHP may have to follow suit, though its own alternative pricing blueprint could have reaped even higher returns, analysts said.

BHP , smaller in iron-ore mining than Rio though larger overall, has yet to announce any agreements with Asian steel mills as it looks at other pricing mechanisms it says are more efficient, marking a departure from previous years when it took a commanding role in setting industry-wide prices.

It also comes as BHP attempts to convince investors Rio would be better off under BHP management.

BHP had already started using a new over-the-counter market to sell ore on the spot market instead of under long-term contracts prior to Rio's latest settlement with China's Baosteel, representing a 96.5 percent jump over last year.

A BHP spokeswoman in Australia, where the firm later on Tuesday is holding a scheduled briefing with its iron ore and coal division heads, declined to comment on iron ore contracts.

Rio shares gained over 1 percent on the back of the hike -- also giving it a chance to trumpet its defence against the $163 billion takeover bid by BHP.

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"BHP was traditionally the one that signed first, then Rio followed," said James Wilson, an analyst for DJ Carmichael & Co. "But now the shoe's on the other foot and maybe Rio is trying to show BHP who's boss in iron ore," Wilson said.

Rio in announcing the new prices, said it was setting a benchmark for all its Hamersley long-term contract sales  for the shipping year ending March 31, 2009.

"The Rio agreement shows the benchmark system is alive and well at least for another year, which could leave BHP no choice but to go along," Wilson said.

Baosteel's agreement with Rio eclipses the 67-71 percent that Chinese mills reached with Brazilian miner Vale.

"The agreement builds on the valuation premium for Rio's Pilbara iron ore businesses ...," Rio's iron ore boss, Sam Walsh, said in a statement.

Both Rio and BHP are relying on strong demand for ore in China to justify the billions of dollars each has earmarked to dig more mines in Australia. Rio forecasts Chinese iron ore imports will double over the next six years.

The value of Rio's Australian iron ore mines, carved out of the deserts of the Pilbara region in west Australia, are at the centre of its defense against BHP's overtures.

Rio is fighting the bid, pitched at 3.4 BHP shares for every Rio share, saying it is too low and fails to appreciate Rio Tinto's growth prospects.

Credit Suisse and Deutsche Bank said last week they would offer cash-settled swaps in iron ore.

BHP shares were up 1.8 percent, partly on hopes it would also achieve a big price rise.

Fund manager Ken West of Perennial Growth Management doubted the iron ore price rise would help Rio's defence against BHP's bid approach. "It's good for Rio and good for BHP in a sense. I don't think it's going to really impact (on the bid)," he said.

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