China’s Leading Steelmaker Agrees To The Biggest Ever Iron Ore Price Increase

Global economic growth remains the primary driver for the dry-bulk shipping industry, which on systematic basis gets fueled primarily by the emerging economies of China, Brazil and India.

This fact has resulted in significant demand for dry bulk products – particularly iron ore, providing a significant boost to its per dry metric tonne unit price.

The Anglo-Australian London-based Rio Tinto (NYSE: RTP), one of the world’s leading mining and exploration companies, said Monday that Baosteel Group, China’s leading steelmaker, would pay it at least 80 percent more for iron ore.

Baosteel, according to Rio Tinto – agreed to pay Rio $144.66 a metric ton for ore known as Pilbara blend fines for the year that began April 1. The Chinese steel maker will also pay Rio $201.69 a ton for Pilbara blend lump, 97 percent more than a year earlier. Obviously, demand for iron ore is still very strong.

According to the China Iron and Steel Association (CISA), global seaborne iron ore trade increased from 718 million tonnes in fiscal ’06 to approximately 807 million tonnes in fiscal ’07. Global seaborne iron ore trade is expected to increase to 829 million in fiscal ’08 and we believe that China’s iron ore imports will remain high well-into 2010 as it continues to focus on infrastructure development. According to China Metallurgical Mining Enterprise Association, China might increase imports of iron ore by 14 percent, to 435 million tons this year alone.

It costs about $55 a ton less to ship ore from Australia compared than from Brazil. Chinese steel makers have argued against paying iron ore producers Rio Tinto and BHP Billiton (NYSE: BHP) a so-called freight premium. Brazil’s Vale (NYSE: RIO), the world’s largest exporter of iron ore said in February it received an increase of from 65 percent to 71 percent for annual contracts.

“I am happy that the market is starting to realize that the freight differential should be reflected in the iron ore price”, the BHP Billiton chief executive, Marius Kloppers, said in London. BHP has demanded for the first time in the Asian market a bigger increase than Vale in Brazil. Rio and BHP have argued that their Australian ore costs less to ship.

Baosteel, which negotiated on behalf of the Chinese steel industry, said the traditional annual pricing system had been maintained despite an unprecedented divergence in the price increase of Australian ore and Brazilian ore. It termed the negotiations with Rio Tinto as “friendly.”

Both BHP and Rio are now trying to move away from term prices that for years have stayed well below spot rates for lower-quality ore, to an index system or some other, more flexible mechanism that reflects spot demand and prices. They are also backing attempts to create iron ore swaps markets, and, possibly someday, an iron ore futures market.

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