Although the 65% drop in half-year profits was in the expected range, revenues at its iron ore operations disappointed: Net earnings at the division came in at $1.9 billion; experts hoped it would bring in at least $2 billion. The company sought to explain the shortfall by pointing to the sharp increase in spot sales against contract sales in the six months. Rio Tinto and BHP Billiton have traditionally sold the majority of their iron ore at a set price. However, the volatility in commodity prices last year shook up that neat system, especially when prices on the spot iron ore market began to tumble below contract prices.
"Chinese mills defaulted on their commitments and bought at spot prices which were below contract," said analysts at Liberum Capital, in a note to investors following the company conference call.
A similar trend appears to have emerged at rival BHP, too: The world's largest miner said that in the year ended June, just 68% of iron ore was sold on contract. In previous years, the company sold as much as 85% to 90% by contract.
The problem with iron ore pricing isn't going away any time soon. In the second half, Rio is selling at a provisional contract price (as usual the annual discussions with the Chinese steel mills are protracted) in the region of $60 a ton, while on the spot market iron ore is gong for around $90. "In the second half, the Chinese appear to be winning again," said Liberum.
