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iron ore price increase

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    Font Size: Decrease Increase Print Page: Print Andrew Trounson, Rowan Callick and Peter Alford | February 19, 2008
    RIO Tinto yesterday said it would push to win an iron ore freight price premium on top of a massive 65 per cent benchmark price increase agreed between Brazilian rival Vale and Japanese steel mills.

    Under pressure from a $US165 billion takeover from local rival BHP Billiton, Rio appears prepared to play hardball with Chinese customers in order to capture a slice of the freight saving that Chinese mills enjoy by sourcing ore from Australia compared with more distant Brazil.

    Rio is following in the wake of BHP, which in 2005 aggressively sought to wring a freight premium from the Chinese, after Vale had secured a 71.5 per cent increase in the benchmark. BHP eventually had to back down, but ever since then a freight premium has always been on the agenda of price talks.

    BHP can also be expected to be pushing for a premium, putting additional pressure on the Chinese mills. The prospect of both major Australian suppliers pushing for a freight premium will increase their chances of success.

    However, Vale has previously warned that if the Australians push for a freight premium, they will demand a premium for the higher quality of their ore. Given that the Chinese have yet to agree to prices, they may seek to play the Australians off against the Brazilians, but will be insistent in not paying any more than the Japanese have already agreed to.

    Both Rio Tinto and BHP Billiton are expected to continue to ramp up spot sales, because yesterday's price settlement, although massive, still leaves Australian ore selling at a steep discount to buoyant spot prices in China.

    "Noting" the deal, Rio's iron ore chief Sam Walsh made it clear last night that his company was not impressed with the settlement, as it was doing what BHP tried and failed to do in 2005 -- seeking a freight premium. "Rio Tinto will continue to negotiate to obtain a freight premium to reflect its proximity to Asia and its major customers," he said.

    Some analysts are forecasting prices to double to around $US200 a tonne. The Vale price increase means benchmark iron ore prices will have more than quadrupled in six years, from around $US19.40 a tonne for Australian ore in 2003-04, to almost $US85 a tonne.

    "

    While China has been keen to be the price setter in iron ore talks, after having agreed to the price for the first time last year, observers said the Chinese would be relieved to let the Japanese take responsibility for such a big price blowout.

    But the Vale price still leaves Australian contract ore trading at a steep discount to Chinese spot prices. Spot prices in China more than doubled last year and are still up around $US200 a tonne, compared with the landed cost of Australian ore of about $US80 a tonne. This latest price increase will raise the landed cost of Australian ore to about $US112.50/tonne.

    "This still leaves the contract price well below the spot market," Citigroup's commodity analyst Alan Heap told The Australian.

    The news failed to boost the miners' shares, with BHP's 3.4-for-1 scrip takeover dominating the market in both stocks.

    BHP fell 33c to $38.96 while Rio shed $3.10 to $134.00.

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