According to a report from Goldman Sachs Group, BHP Billiton (BHP.US) could face pricing pressure shocks amounting to as much as $2 billion, driven by expanded discounts and a collapse in lump ore premiums following China's procurement restrictions on Jimblebar iron ore. Analysts led by Matt Greene noted in a January 27 report that these restrictions may cause the company's key iron ore fines product to encounter incremental discounts in the spot market, potentially leading to annual losses of approximately $1 billion. Additionally, discounts on lump ore products could inflict a further $1 billion revenue impact, with the discount on Newman lump ore driving a drastic 80% plunge in premiums for that product. China implemented these restrictions last September, aiming to strengthen its bargaining power as the world's largest iron ore buyer against top suppliers and asserting that its massive steel industry deserves more favorable terms. The report stated that this initiative, advanced by the state-backed China Mineral Resources Group Co., is reshaping the market's pricing mechanism, which has long been dominated by seaborne benchmark prices. Goldman cautiously noted that its estimates are not a complete representation of actual transaction prices due to factors like product mix, time lags, and contract terms, but indicated the analysis provides a framework for assessing current pricing dynamics. A BHP Billiton spokesperson declined to comment, while the company stated last week that annual contract terms with China Mineral Resources Group are still under negotiation. Analysts remarked, "Our communications indicate these restrictions are expected to persist beyond the Lunar New Year. BHP is currently absorbing the pricing shock, but maintaining its preferred pricing framework could preserve greater value in the long term." Since the restrictions took effect, inventories of Jimblebar iron ore at Chinese ports have remained elevated, with some cargoes struggling to find buyers and being diverted to other markets. The analysts added that the decline in lump ore market premiums has also affected the pricing of Rio Tinto Group's Pilbara Blend lump ore, potentially creating an approximate $1.2 billion revenue impact for that company. A Rio Tinto spokesperson also declined to comment.
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