BHP Billiton has agreed to a cut in coking coal prices for Japanese steel makers, but the reduction is smaller than expected, indicating that separate talks on iron ore prices could also be positive for the world’s biggest mining company.

BHP Billiton Mitsubishi Alliance, a coal mining venture controlled by the Anglo-Australian group, will sell high-quality coking coal for US$115 a tonne from April 1, according to Japan’s JFE Steel Corporation and Sumitomo Metal Industries.

While this represented an 8 per cent drop on 2005 prices, the fall - the first for three years - was smaller than analysts’ earlier forecasts.

A price cut had been widely anticipated after coal producers introduced a massive 120 per cent increase in coking coal prices in 2005.

Prices of lower-grade coking coal will be reduced by as much as US$20, or 16 per cent, from 2005, compared with an earlier forecast of 20 per cent by some analysts.

“We had a lot of rumours and talk of sales at substantially lower prices for lower quality coal,” said Neil Boyd-Clark, an analyst at ABN Amro Asset management in Sydney. “This gives the market a certain amount of confidence.”

Shares in the Melbourne-based miner ended trading in Australia rose almost 4 per cent on Friday to A$26.05, with more than A$600m worth changing hands.

Analysts said the coal price settlement indicated that iron ore prices, which are still under negotiation, would remain firm in 2006, as strong demand continued for steel raw materials. Iron ore is BHP’s most profitable business.

Iron ore prices jumped 71.5 per cent last year, and analysts expect mining companies to press for a price increase of up to 20 per cent in 2006.

“You can assume that the sentiment for iron ore will now be very positive because it basically indicates that the steel raw materials market is very strong,” said Mark Pervan, a resources analyst at broker Daiwa Securities SMBC in Melbourne.

Ben Lyons, a resources analyst at Macquarie Equities in Sydney, said the drop in coal prices meant that Japanese mills “can afford to pay higher iron ore prices”.

While BHP’s iron ore business showed little growth in the last quarter of 2005, the group has been expanding its Australian mines to satisfy demand from Chinese steelmakers.

BHP Billiton would not confirm the coking coal prices agreement and said it would only comment on contract prices when the bulk of its negotiations had been finalised.

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