ore price hike, page-10

re: re:rio ore price hike 9.5 p cent CVRD, Baosteel Agree to Benchmark Iron-Ore Price Rise (Update5)

By Matthew Craze and Jeb Blount

Dec. 21 (Bloomberg) -- Vale do Rio Doce, the world's biggest iron-ore maker, and China's Baosteel Group Corp. agreed to raise prices next year by 9.5 percent, setting a benchmark that will boost costs for steelmakers worldwide.

Baosteel will pay 73.2 cents per iron unit for ore from the Carajas mine in Brazil, compared with 66.85 cents in 2006, Rio de Janeiro-based Vale said today in a statement. The deal marks the first time a steelmaker from China, not Europe or Japan, has signed the industry's initial supply contract for the new year with Vale, BHP Billiton Ltd. or Rio Tinto Ltd., who together control two-thirds of global iron-ore trade.

The move may help repair relations between Chinese steel producers and Vale, also known as CVRD. Baosteel, China's largest steelmaker, threatened not to pay the 19 percent price increase set by CVRD and ThyssenKrupp AG in 2006. The year before, prices jumped 71 percent. The price of steel in the U.S. fell to a seven-month low in November.

``CVRD has pushed for a higher rise but they just decided to get on with it for the health of the longer-term relationship,'' said Jim Lennon, commodities research chief at Macquarie Bank Ltd. in London. ``It's more about cementing the long-term relationship and not to push steelmakers into aggressive moves to invest in their own iron-ore capacity.''

Average Prices

In addition to ore from the Carajas mine in the Amazon region, Baosteel will pay 72.11 cents per iron unit for ore from CVRD mines in Minas Gerais in Brazil's central highlands, the company said in the statement.

Iron units are an industry standard for iron content in raw ore that must be further processed to extract the pure metal. Baosteel, which will import the ore, agreed to pay about $73.20 for each metric ton of pure iron from the CVRD ore. The company may pay less than that for each ton of ore because the iron content varies.

Based on average prices reported by CVRD in its third- quarter earnings report, steelmakers will pay about $44.47 a ton for each ton of CVRD ore they buy with an average iron content of 61 percent.

The deal will raise costs to produce steel by $5.80 a metric ton, Lennon said.

CVRD didn't settle on 2006 iron prices until May, after six months of negotiations. China's government resisted the 2006 price increase and in March accused CVRD, Rio and BHP, known in the industry as the ``Big 3'' of reaping ``huge and unreasonable profits.'' CVRD posted 10.4 billion reais ($4.8 billion) in net profit in 2005.

Lead Negotiator

Baosteel was charged with leading the negotiations for all of China's steelmakers, which total about 260. The company's chairwoman, Xie Qihua, in an Oct. 4 interview likened the three mining companies to ``elephants'' and said recent iron-ore price increases were ``unfair.''

Five consecutive years of increases that lifted prices by 189 percent have prompted some steelmakers to invest in developing their own iron-ore supplies.

Citic Pacific Ltd., a unit of China's biggest state-run company, proposed spending A$2.6 billion ($2.05 billion) on the Cape Preston iron ore project in Australia, and Sinosteel Group Corp. is studying projects in Gabon, Cambodia and North Korea.

Arcelor Mittal, the world's biggest steelmaker, announced today a $9 billion investment in Orissa, where India's richest iron-ore reserves are located.

CVRD Chief Executive Roger Agnelli, 47, has said higher prices are needed to finance expansion of mines as demand surges in China, the world's largest steel producer.

China's Steel Output

China's total crude steel output may rise 10 percent to 462 million metric tons in 2007 from a 2005 forecast of 420 million tons, Luo Bingsheng, vice chairman of China Iron and Steel Association said yesterday. China produces more than 40 percent of the world's steel.

CVRD is the largest supplier of iron-ore to China and supplies about a third of world exports. Its production has more than doubled to 263 million tons in 2006 from 133 million tons in 2001, according to CVRD's Web site. Output is expected to rise 14 percent in 2007.

CVRD needed to back down from larger price increases or face an onslaught of new mine projects that would weaken its power to set prices in future years, said Marco Polo de Mello, vice president of Brazil's Steel Institute, a Rio de Janeiro- based organization that represents Brazil's main steelmakers.

``I think Agnelli overplayed his hand in the last round of ore talks,'' De Mello said in an interview yesterday. ``The Chinese have something like a trillion dollars sitting around, just imagine what you could do with that.''

CVRD shares fell 32 centavos, or 0.6 percent, to 52.80 reais at 4 p.m. in Sao Paulo. Earlier shares rose as much as 1.33 reais, or 2.5 percent, to 54.45 reais, a record. BHP Billiton fell 6.5 pence, or 0.7 percent, to 922 pence. Earlier it rose as high as 15 pence, or 1.6 percent, to 943.5 pence.

To contact the reporter on this story: Jeb Blount in Rio de Janeiro at