why so cheap compared to rio it , page-49

re: iron ore pricing 2006 - update Rio, BHP to haggle ore
By Andrew Trounson
16-01-2006
From: The Australian

BACKED by a continuing tight market, Australian iron ore majors Rio Tinto and BHP Billiton are expected to press for a significant hike in contract prices this week when they resume annual price talks with Japanese steel mills in Tokyo.

But the most important meeting in Tokyo this week will be that between the mills and world's largest producer, Brazil's CVRD, the acknowledged price setter among the producers and which has so far taken an aggressive stance.

The Brazilians are rumoured to have sought a rise of as much as 40 per cent in initial negotiations to compensate it for a sharp rise in Brazil's currency, the real.

But in the wake of last year's 71.5 per cent rise and recent declines in steel prices, the market is forecasting a more moderate increase of up to 20 per cent.

BHP and Rio are likely to give CVRD the running, although secretly they may have been prepared to cut the mills some slack if only to discourage the rising number of new entrants in Australia that are increasingly snapping at their heels.

BHP is again expected to highlight the freight cost advantage of Australian iron ore over Brazil, but it isn't clear whether it is prepared to press for a compensating freight premium as it unsuccessfully did last year.

BHP's stance last year was roundly condemned by the Chinese and Japanese mills.

However, the prospects of a settlement in the short term appear remote.

When talks broke up in December, the Japan-based Tex Report noted that little common ground had been reached.

Last week, China's Xinhua news service reported that there had been little progress in talks between its lead negotiator, Baosteel, and the miners.

Despite the tight market conditions, the Chinese are demanding a price cut given the weakening steel market and the prospect of rising iron ore production. The China Iron & Steel Association and 16 of the nation's steelmakers, including Baosteel, met last Thursday to discuss the strategies for their negotiations with iron ore suppliers.

But iron ore imports into China remain strong. Chinese imports for 2005 were up 32 per cent on the previous year at 280 million tonnes.

Last week, ABN AMRO repeated its forecast of a 10 per cent rise.

"The consumers seem to be acknowledging that the market is tight and prices are likely to rise," ABN AMRO said. "The tussle now centres on what is fair."

While the rise in the Brazilian real means CVRD is now receiving 15 per cent less for its iron ore that it was in April, ABN AMRO notes that the Japanese, in yen terms, are having to pay 6 per cent more.

"The picture still favours a rise which, regardless of the outcome, will mean the cash flows for the iron ore miners should continue to look healthy throughout 2006." it said.

Goldman Sachs last week forecast an 18 per cent price rise.