The world's largest and the third-largest iron ore miners Vale of Brazil and Anglo Australian miner BHP Billiton, have made a breakthrough in trashing the old annual iron ore benchmark system by getting the Japanese steel mills to agree to a quarterly system, with Vale managing to get a 90-per cent rate hike for this quarter.

This is an important breakthrough for the miners, especially for BHP Billiton, which has been clamouring  for junking the system of annual iron ore contracts.

In a statement, the Melbourne-based BHP Billiton said today that it had reached agreement with a significant number of customers throughout Asia to move existing iron ore contracts that were previously priced annually onto a shorter term landed price equivalent basis.

The world's largest mining company added that the agreements reached were for the majority of its iron ore sales.

Vale, which earned 58 per cent of its 2009 revenues of 28.6 billion from sale of iron ore, today struck a deal with Japan's Nippon Steel and Sumitomo Metal Industries to sell iron ore at $100 to $110 a metric ton for the quarter commencing 1 April.

Nippon Steel is the world's second-largest steelmaker, while Sumitomo Metal is Japan's third-largest steelmaker.

This will represent a 90-per cent increase from the $60 a tonne agreed by Japanese and Korean steel makers with the big three miners last year. (See: Chinese steelmakers upset with Nippon Steel's ore price-cut deal with Rio and Chinese steel makers reject new ore contract rate in Rio-Nippon deal)

Vale's pricing with with the two Ja[panese steel makers is expected to act as a benchmark in negotiations with South Korea's Posco, which usually negotiates long-term iron ore supply contract price jointly with Nippon Steel.

Last month, Vale had called on Anglo Australian rivals BHP Billiton and Rio Tinto to join it in dumping the 40-year old system of annual contract pricing in favour of spot prices, also mooted by BHP Billiton in the last two years.

Jose Carlos Martin, executive director, ferrous minerals, at the Rio de Janeiro-based Vale, had said that the huge difference in the benchmark and spot prices last year required a review of the decades-old benchmark system.

According to Martin, 50 per cent of the global seaborne iron ore trade is under spot market prices, with China buying nearly 70 per cent of its iron ore from the spot market.

Since the spot market price is a reality, unlike benchmark prices that are subject to negotiations, Martin wanted iron ore consumers to accept this pricing system.

Last year, the three miners had negotiated iron ore prices with Japanese and Korean steelmakers under the benchmark system at $60 a tonne, even when spot prices had been prevailing between $100 - $130 a tonne since November, after having plunged below the benchmark rates. They are currently hovering around $120 a tonne.

The aggressive posture suddenly adopted by Vale had caught the global steel industry by surprise since the Brazilian miner had always favoured the benchmark system. Interestingly, BHP Billiton's chief executive Marius Klopper had said last month that it was high time that long-term contract pricing system was dumped.

This benchmark deal negotiated successfully by Vale and BHP Billiton will put China, the biggest importer of iron ore in a fix since it had demanded that the miners set the long-term iron price with them instead of Japanese and Korean stel makers, and also change the commencement of the contract from April to January.

Last year, China did not conclude the benchmark prices with the big three ore miners, since it was seeking a 40-per cent ewduction in prices, while the miners were not willing to yield to more than 30 per cent.

China, the world's biggest producer and consumer of steel, imported a record 325 million tons of iron ore last year, of which, 60 per cent came from Australia and Brazil, while India, the third largest supplier to China, supplied 23 per cent. The remaining 17 per cent was sourced from South Africa and other countries.

It will now find that it has no option but to accept the new terms and pricing or once again like last year  end up paying higher prices for sourcing ore from the spot markets to keep its steel mills running.