EXPECTATIONS of higher benchmark iron ore prices are rising with the rumour that Brazilian mining giant Vale has pitched a massive 70 per cent price increase at Chinese negotiators.
Vale may have proposed a price hike for iron ore. Picture: Bloomberg Such a rise would replicate the 71.5 per cent price rise in 2005-06 when the market was caught short by iron ore suppliers badly underestimating the extent of China's soaring steel production and consequent iron ore demand.
The spot market has been trading at more than double the current delivered contract price, but a price increase of 70 per cent is seen as probably an opening gambit from the Brazilians.
That is because the spot market represents only a small part of the global seaborne market.
New production is also expected to bring tight iron ore markets more into balance this year, suggesting the surge in iron ore prices is nearing its peak.
The talk will encourage Australian giants Rio Tinto and BHP Billiton, which believe Vale undersold the industry last year by agreeing to a price increase of 9.5 per cent, only for the spot market to soar. That increase priced Australian iron ore fines, or powders, at about $US51.50 a tonne.
An opening offer from Vale of that scale would also underpin analysts' forecasts that contract prices could rise at much as 50 per cent.
The low end of consensus forecasts on an iron ore price rise is gradually moving up, from about 25 per cent to at least 35 per cent.
Expectations of higher coal prices are also rising.
Near-term forecasts for base metals are being pulled back, however, on fears of a recession in the US and slowing economies in the developed world.
Bulk commodity price cycles typically lag those in more openly traded base metals.
Macquarie Bank yesterday reiterated its forecast for a 50 per cent increase in contract iron ore prices and tipped prices to roll over in 2009-10.
"The supply argument may well temper next year's rises from the 50-100 per cent range as suggested by some, but the iron ore shortage should still be apparent in the first half of 2008," Macquarie said.
The benchmark iron ore price negotiations between Asian steel mills and the three big producers look set to drag on well into the year with the Chinese on one side waiting for a softening in the spot market, and the producers on the other side determined to make up for price gains they feel were left on the table last time.
Certainly Rio Tinto can be expected to play hardball in an attempt to maximise the price increase, given that a bid from rival BHP Billiton is looming.
According to one industry source, the price talks are still in the preliminary stages, which is late given that current 2006-07 contracts are due to expire at the end of March. However, in the past talks have occasionally dragged on into the new contract year, and prices for 2006-07 were not finally settled with the Chinese until June. "I think they are still in the opening salvo stage," said the source.
Vale is shaping as the likely price setter this year, with the Australians likely to be steadfast, particularly as high freight rates mean the Chinese are paying more for buying Brazilian iron ore than for Australian product, for which transport costs are lower.
Macquarie says, however, the Australians are unlikely to succeed in any attempt to win a reward premium for the lower freight cost, especially as the wide freight differential with Brazil is set to narrow as more and bigger ships come in service.
Instead BHP and Rio appear focused more on increasing spot sales to capitalise on the strong market and put pressure on Chinese buyers to pay up for long-term contracts.
UBS yesterday tipped a 60 per cent rise in 2008-09 thermal coal prices to $US90 a tonne, up from its previous forecast of $US70 a tonne.
UBS is forecasting further price increases for 2009-10 and 2010-11 as power demand rises in Asia.
Similarly, Macquarie is now forecasting thermal coal prices of $US88 a tonne, up from $US70 a tonne.
Macquarie has also increased its 2008-09 hard coking coal benchmark price forecast by 11 per cent to $US150 a tonne - an increase of more than 50 per cent on the current price of $US98 a tonne.
On the downside, Macquarie has cut its 2008 average copper price forecast by 20 per cent, cut zinc price by 18 per cent, aluminium prices by 8 per cent, and nickel by 6 per cent.
GWR Price at posting:
0.0¢ Sentiment: ST Buy Disclosure: Held
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