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iron prices up

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    Iron prices up, but Rio's not playing along

    Kate Hayc#ck
    Tuesday, 19 February 2008

    AS A tsunami of Japanese steelmakers announce their agreement to a minimum 65% iron ore price hike with Brazilian giant Companhia Vale do Rio Doce (Vale), attention has turned to the Australian majors with Rio Tinto saying it will press the steel industry for more.



    In a statement this morning, Rio's iron ore chief executive Sam Walsh said the company's negotiations with its own customers were continuing.

    However, Walsh indicated Rio would not be content this year to receive the same price for its iron ore as its Brazilian competitor.

    "In any event, Rio Tinto will continue to negotiate to obtain a freight premium to reflect its proximity to Asia and its major customers," he said.

    He also said Rio would be seeking clarification from the companies about the contract prices settled with Vale, in particular the prices for Carajas iron ore, which Walsh said was the relevant reference for Rio's products.

    Vale dominates the seaborne iron ore trade and also has dominated iron ore price benchmarks, with last year's 9.5% price increase coming after an agreement between the Brazilian major and Chinese company Baosteel. Under the benchmark system, the first price agreed to for the year is the recognised price level for contract sales.

    Vale confirmed this morning that Japanese companies Nisshin Steel, Sumitomo Metals, Kobe Steel, JFE Steel and Nippon Steel, along with Korean POSCO, had agreed to its price rises.

    The price rises begin at 65% for Vale's Southern System fines, while the higher quality Carajas iron ore fines will be 71% more expensive than last year's price.

    This brings Vale's new reference prices for Southern System fines to $US1.1898 per dry metric tonne unit and $1.2517 for Carajas fines, Vale said today.

    On the iron ore spot market, prices have been as high as $US200 per tonne, and both Rio and BHP have indicated a willingness to consider selling more of their ore into the spot market in coming years.

    ANZ commodities analyst Mark Pervan told MiningNews.net that it would be a "watershed development" if either Rio Tinto or BHP Billiton negotiated a higher price with steel mills than those announced by Vale.

    "It would [mean] a shift in the whole benchmark price negotiations," he said.

    "We've had [price differential] talk for the last couple of years and I don't see it happening this year, I think there needs to be further restructuring in the industry, such as a local spot price index."

    However, Pervan indicated the Australian producers would most likely be able to capitalise on the higher Carajas fines pricing, as Rio indicated.

    "That's still an incredibly good outcome when you look at iron ore, which is a very profitable business for both those producers already. So adding 71% to the revenue line – more than half of that will drop to the bottom line."

    Pervan also said the steel mills would be well aware that Rio and BHP were doing very well out of iron ore.

    "They're going to play hardball, and I can't see them breaking down that whole current pricing structure yet," he said.

    Pervan also said the Japanese steel industry may have moved first to agree to the pricing with Vale – rather than a Chinese company like Baosteel setting the price – on supply concerns, given China's increasingly ravenous demand for the bulk commodity.

    He also said it was no coincidence that Vale had set the prices each year, as the company is in a reduced bargaining position compared to the Australian producers due to its higher shipping costs.

    "The steel mills are playing this very smartly, negotiating with [Vale] rather than the Australians.

    "[Vale] has a lower freight differential into their market, they've got higher priced iron ore into that market so they don't have the price leveraging that the Australians do," Pervan added.

    Meanwhile, German steelmaker ThyssenKrupp has also reportedly agreed to a 65% price hike.

    Chinese iron ore producers have yet to make any official statements on their position on the price rises, beyond indicating that their discussions could wind up in February.

    The new prices come into effect on April 1.

    Rio's share price was last trading at $137.65, up $3.65 in intra-day trade, while BHP was up $1.02 to $39.98.


 
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