arh to start pilbara mine in 2012, page-3

Rio's ship comes sailing in

June 24, 2008

CHINA'S steel industry has caved in to demands for huge increases in contract iron ore shipments from Australia.

The bonanza settlement - led by Rio Tinto - includes a first-time recognition that there should be a sharing of the so-called freight advantage Australian iron ore landed in China has over supplies from Brazil.

Rio is set to turn the settlement to its advantage by arguing that BHP Billiton's takeover bid for the group remains well short of full value, especially as Rio is the dominant producer in the Pilbara.

News of the settlement emerged in London last night, with Rio said to have secured a whopping 96.5% increase for "lump" iron ore shipments and 79.88% for iron ore "fines". Across the product range, the price increase - in US dollars - equates to an 85% increase.

Rio has been talking tough with Chinese steel makers for a bigger increase than was secured in February by the world's biggest iron ore exporter, Vale. Vale secured a 71% increase for its premium Carajas fines product and a 65% increase for its Itabira brand of fines.

On a like-for-like basis, the respective settlements mean that Rio has secured an additional $US7.45 a tonne on top of the $US65 a tonne that Vale will be receiving for its fines in China. The premium is a part recoupment of the freight differential between iron ore from the Pilbara and iron ore from Brazil.

Earlier this year, the freight differential blew out to as much as $US45 a tonne - reflecting the shorter distance from the Pilbara to China and soaring day rates for the world's bulk carrier ships.

The Rio settlement heads off the potentially explosive situation where supply contracts for shipments after June 30 could have been redirected to the spot market by Rio at substantially higher prices than now applies in the contract market.

The latest price increase is the sixth consecutive rise and at the higher end of expectations. Rio said earlier this year that a 65% iron ore price increase would boost its annual earnings by a hefty $US2.97 billion ($A3.25 billion).

BHP is not as big in iron ore as Rio but when its likely profit boost - and that of other iron ore producers - is added in, the combined profit impact for the Australian industry is estimated at more than $5 billion.

That is a tax-paid figure, with Canberra's coffers continuing to benefit from the China-led boom in commodity prices.

The downside from the price strength in mineral exports is that it has helped fuel strong rises in the dollar at a time when it is already under upward pressure because of the interest rate increases being applied to cool the overheating local economy.

Last year's 9% iron ore price increase was effectively wiped out by the rise in the dollar against the US dollar, the currency in which iron ore is priced.

Meanwhile, Bloomberg reports that expectations of the big iron ore price, along with planned volume increases, were a factor in the Federal Government's chief commodity forecaster, the Australian Bureau of Agricultural and Resource Economics, upgrading its June-year forecast of commodity exports by 12%.

Sales might rise to a record $212 billion in the year to June 30, 2009, ABARE said. That compares with its March forecast of $189 billion and estimated 2008 sales of $151 billion.

Economic growth in China is forecast at 10% in 2008, before easing to 9.5% in 2009.

Australia's exports of minerals and energy were forecast to be $178 billion in fiscal 2009, up from $121 billion a year earlier, the bureau said. The volume of iron ore exports was forecast to reach 18% while coking coal would gain 7%, the bureau said.

Annual contract prices for thermal coal more than doubled to $US125 a tonne for the year from April 1, and coking coal used in steel making tripled to $US300 a tonne.