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Iron ore price tipped to rise 40pc, says ANZ

From: The Australian January 13, 2010

THE price battle in the controversial iron ore negotiations is expected to intensify. ANZ senior commodities analyst Mark Pervan has increased his forecast for contract iron ore prices from a 20 per cent to a 40 per cent gain this year.

Mr Pervan said the prediction was at the top end of market consensus, which was on a 20 per cent to 40 per cent rise.

But he said it could end up being conservative, with spot iron ore prices now 80 per cent above the current 2009 contract price.

"We expect the Chinese steel mills to negotiate the benchmark outcome, and early, on the fear of repeating last year's debacle when Japanese steel mills ended up striking an unpalatable outcome," he said.

"This creates more contract price upside, with little time left for super high spot prices to ease."

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Britain's Ocean Equities analyst Sam Spring said the balance of power in the negotiations remained with the major producers because the near- to medium-term outlook for iron ore remained supplied-constrained.

And it has been reported that the top three producers -- Rio Tinto, BHP Billiton and Brazil's Vale -- have not held significant pricing talks with China and are focusing on Japanese customers to reach a benchmark deal they can then present to China on a "take it or leave it" basis.

"At the end of the day, whether it is a contract, spot price or hybrid mechanism that is predominantly adopted in the industry this year, there still remains the three dominant suppliers who sell their ore to a significant number of individual steel mills and trading houses, despite the majority of buyers being in China," Mr Spring said.

It is not just iron ore prices being driven higher by Chinese demand.

Thermal coal has also been boosted by the economic powerhouse as it suffers through a record-breaking winter.

Commonwealth Bank commodity strategist David Moore said the Newcastle thermal coal spot prices jumped dramatically last week, lifting 12.8 per cent higher to $US95.61 a tonne.

In Australian dollar terms, Newcastle spot thermal coal prices are now $103.39 a tonne, the first time above $100 a tonne since February last year.

"In Europe, the coldest weather for decades has lifted energy demand, while in China, the heaviest snowfalls for decades have strained internal bulk commodity transport infrastructure," Mr Moore said.