Rio Tinto has reached agreement with Japan’s Nippon Steel on JFY10 iron ore prices.

The agreement is as follows:

Iron ore fines – US¢97/dmtu down 33% from US¢145/dmtu

Iron ore lump  US¢112/dmtu down 44% from US¢202/dmtu

(dmtu – dry metric tonne unit)

We had assumed price reductions of 35% for fines and 40% for lump, hence the contract prices are roughly in line with what we had expected. We believe the result is ahead of consensus expectations which ranged from 30-50% reductions for both fines and lump. The removal of the contract pricing uncertainty should also be a positive for most of the iron ore companies.

The biggest leverage to the news (aside from BHP and RIO) is FMG and MGX, the largest of the independent iron ore producers. AGO and MMX should also benefit from the removal of the uncertainty surrounding prices. Our preferred pick is FMG.