By Yoshifumi Takemoto and Jesse Riseborough
February 18, 2008
Feb. 18 (Bloomberg) -- Japanese steelmakers led by Nippon Steel Corp. agreed to a 65 percent increase in annual iron ore prices, a Japanese steel company official said, setting a global benchmark for prices of the steelmaking raw material.
The increase will apply for the 12 months from April 1 after Tokyo-based Nippon Steel, Japan's biggest mill, settled an accord with Cia. Vale do Rio Doce, said the official, who declined to be named because the talks are confidential.
Iron ore prices will rise for six years to a record as China increases output of steel, boosting earnings at the three biggest exporters, Brazil's Vale, Rio Tinto Group and BHP Billiton Ltd. Prices may rise as much as 70 percent because of a global supply deficit, Credit Suisse Group said last month.
``A 65 percent increase in a revenue line is going to be a big kicker'' for iron ore producers, said Mark Pervan, a senior commodity strategist at Australia and New Zealand Banking Group Ltd., said today by phone from Melbourne. ``They are going to get a least half of that back in profit.''
Melbourne-based BHP fell as much as 80 cents, or 2 percent, to A$38.49 and traded at A$38.85 at 12:54 p.m. Sydney time on the Australian Stock Exchange. Rio declined 1.4 percent to A$135.26. Nippon Steel climbed 3.8 percent to 578 yen as of 9:48 a.m. on the Tokyo Stock Exchange. Rival steelmakers also surged, fueling a 4.1 percent advance in the Topix Iron & Steel index.
Large Portion
``They should be able to pass through a large portion of the costs,'' Frederic Gits, senior director at Fitch Ratings in Tokyo said today by telephone. ``Their end customers in shipping and automakers are still doing pretty well.''
Soaring demand for cars and ships in China is stoking Asian appetite for steel, allowing Nippon Steel, Posco and rivals to raise product prices. Chiana, the world's fourth-largest economy expanded 11.4 percent last year, the fastest pace in 13 years.
Contract prices for Rio Tinto's products, which don't include shipping and insurance costs, were set at $51.47 a metric ton for the year starting April 1, 2007. Including freight, contracted iron ore was sold in December for $85 a ton, Rio Tinto said in a Dec. 18 statement.
Ian Head, a Melbourne-based spokesman for Rio, and Samantha Evans, spokeswoman for Melbourne-based BHP, both declined to comment today by phone. Rio and BHP are the world's second-and third-largest exporters of the ore. Masato Suzuki and Hayato Uchida, spokesmen for Nippon Steel, were unavailable for immediate comment. Reuters reported earlier that Nippon Steel agreed to the increase, citing industry executives and a Chinese steel industry Web site.
Lehman, Goldman
Iron ore sold under long-term supply contracts may climb as much as 80 percent from April, according to a survey of four analysts Bloomberg News published Feb. 8. The biggest gain previously was 71.5 percent in the year starting April 1, 2005.
Lehman Brothers Holdings Inc. said in December that contract prices could rise 50 percent this year. Goldman Sachs JBWere Pty. in November said they could increase by more than 50 percent. Investors expect a 40 percent increase, and any gains above that will lead to earnings revisions for mining companies, Credit Suisse said Jan. 16.
``The result is higher than the market expectation of 50 percent,'' said Helen Wang, Shanghai-based analyst with DBS Vickers Hong Kong Ltd., ``Although the steel prices are rising now, steelmakers will feel pressure from the higher raw-material costs late this year as prices may fall back.''
`Mega Merger'
Nippon agreed a 9.5 percent gain in ore ore prices for the 12 months from April 1, 2007, after Baosteel Group Corp., China's biggest steelmaker, settled with Vale, or CVRD, the world's biggest iron ore mining company. It was the first time China had set a benchmark price increase for steelmakers worldwide.
``I would imagine CVRD,'' had settled the price negotiations,'' ANZ's Pervan said. ``BHP and Rio are just too sidelined with this big mega merger.''
Calls and an e-mail sent to Fernando Thompson, a Rio de Janeiro-based spokesman for Vale, weren't immediately returned. Vale sought a 70 percent gain in talks with Chinese steelmakers, the Australian reported Jan. 15, citing market talk.
The increase accepted by an unidentified international steel producer was reported on the Umetal Web site yesterday, Reuters said. Industry executives named Nippon Steel as the party completing the transaction, the news service reported, without confirmation from the company.
Source: Bloomberg
Japanese Mills Agree 65% Iron Ore Gain
