Annual iron ore prices should see a large increase in 2010, BHP Billiton chief executive Marius Kloppers said on Australian television and repeated suggestions to move towards a more flexible pricing mechanism.

Kloppers said in on ABC's Inside Business programme, aired Sunday but recorded on Friday, that iron ore forward prices stood around 100 percent above benchmark prices, and demand from China had picked up from the global downturn faster than expected.

For iron ore, coking coal, the prices that we get today were settled at the depth of the economic crisis so I think there's probably a good chance that they will go up from where they are today, Kloppers told the Australian Broadcasting Corporation (ABC).

I don't know what the price settlement will be when we get to that point. What I do know is that today's price is almost double what last year's benchmark.

Iron ore talks last year broke down when China failed to negotiate a bigger discount than the 33 percent reduction won by other Asian rivals in the annual face-off between mills and miners.

Kloppers repeated comments that the way forward was to use a system that responded more quickly to changing market conditions.

Prices settled at around $60 a tonne on a free on board (FOB) basis versus current spot prices of more than $120 cost, insurance, freight (CIF) China.

One must remember what the benchmark price is. Once a year people sit down and they try and discover the forward price for the next 12 months, which is set by the supply and demand that they anticipate for the next 12 months, he said.

Kloppers hinted at iron ore swaps markets as a possible solution.

It's a difficult job because there's a lot of volatility ... but they are in luck. They have this market, the traded market, on which over 70 percent of the iron ore in China is already traded. And where there is a forward price visible. And that price is roughly 100 percent above where today's price is.

We think economically the only way to avoid the friction of a benchmark price negotiation that goes on for six months is to have something which is very clear and you can observe it every day.

That friction came to a head last year when a senior Rio Tinto executive in China, Australian citizen Stern Hu, and three Chinese employees were arrested and later charged with bribery and stealing commercial secrets.

The case has strained relations between China and Australia, where much of the iron ore used by Chinese steel mills is mined.

Kloppers comments amid the annual negotiations between the world's leading iron ore producers and their customers, suggest BHP might be angling for a much bigger rise than many analysts are predicting and a long way from the 40 percent interim price arrangements reported in recent days.

The source for that 40 percent increase, Hu Kai, an analyst at China's Umetal, told Reuters: This is just a temporary price that the mills are using right now, my contacts in the industry said. And added it could not be regarded as a benchmark.

With BHP's eyes apparently fixed on forward markets as the price mechanism of choice, a senior market source had questioned why BHP would accept a 40 percent rise in the benchmark, which would bring prices to around $84 a tonne, when spot prices and swaps markets were so much higher.

The Steel Index iron ore benchmark was almost $130 a tonne on a landed China basis and swaps for calendar 2010 were around $117.50.

Taking freight costs of around $9 from Port Hedland to Qingdao into account, suggested the swaps market was pricing in a rise in annual prices on an FOB basis of around $108.

These negotiations are far from over. Indeed there is a good chance they won't agree at all, the source said.

Kloppers said BHP Billiton's forecasts suggested steel production by Chinese mills would increase for at least another 20 years, doubling from current levels by 2025.

Chinese steel production had ramped up so quickly and the question we asked of ourselves is, is it going to continue? So we did a bottom-up analysis. How many buildings, what is the steel intensity and so on and we think that this trend is going to go on for the twenty years that we've forecast. (Editing by Sugita Katyal) (Sydney Newsroom +612 9373 1816)

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