June 25, 2008

Ore Prices Balloon for Steel Makers

A day after Rio Tinto clinched an agreement to nearly double the price of its iron ore shipments to the biggest steel maker in China, the focus Tuesday was on whether BHP Billiton would be able to negotiate an even higher deal.

Iron ore prices have been rising sharply amid strong growth in emerging economies and as investors look to profit from commodity futures as equity markets falter. Steel producers have sought to pass along the higher cost to their customers, adding to inflationary pressures in the world economy.

Rio Tinto's new deal, which marked the biggest price increase for iron ore in at least a decade, calls for Baosteel to pay as much as 96.5 percent more than in the old contract. That eclipsed the 65 percent to 71 percent increases that the Brazilian miner Vale negotiated with Asian steel producers in February. BHP, the only major producer still in talks with its clients, hinted that those increases might still not be enough.

Marius Kloppers, chief executive of BHP, declined Monday to say if BHP would agree to the same terms, but said the deal represented a small step toward a needed adjustment for a disparity in freight rates from Brazil and Australia.

"We're talking about a quarter of the long-term freight differential that was captured, but at today's rates it's only about a tenth," he said. "Clearly this is something we need to work at."

BHP also raised the estimate of reserves at its biggest Western Australia iron ore operation by 23 percent, and said the iron ore division would triple its capacity from 2007 to 2015.

The stakes are also high for steel makers like Baosteel. Shares of its listed subsidiary, Baoshan Iron and Steel, fell 7.8 percent Tuesday on fears that higher ore costs would erode profit.

The failure of Baosteel to reach a settlement with BHP as of Tuesday appeared to put Asian steel makers at risk of further price increases.

Steel makers in South Korea and Taiwan are waiting for Japanese mills to reach a deal with Australian miners, but can continue to pay the prices agreed to last year until the end of September.

Nippon Steel, the world's second-biggest steel maker after ArcelorMittal, said Tuesday that it was still negotiating an iron ore contract with Rio Tinto, and that it had not agreed to pay double the previous price, as was reported in the business daily The Nikkei.

Haroon Hassan, a spokesman for ArcelorMittal in London, declined to comment on its pricing agreements. ArcelorMittal has operations in Europe, Asia, Africa and the United States.

Shares in Posco, the South Korean steel maker, fell 1.9 percent. The company said Tuesday that it would raise steel prices by 21 percent in July.

This year is the first time that miners have not all accepted the same increase in iron ore prices, opening the door to further differentiation based on ore quality and origin. Traditionally, all mills and miners accepted whatever settlement was reached first.

The annual pricing system has proved too inflexible as rapidly expanding Chinese steel capacity has caused spot iron ore prices and freight rates to balloon over the last few years.

BHP and Rio Tinto have called for annual price talks to be replaced by a more flexible index pricing system. They also want higher prices to offset the lower cost of shipping ore from Australia, compared with Brazil.

Originally published by Reuters.

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