Matt Chambers | June 04, 2008 IRON ore contract talks are probably swinging further Rio Tinto and BHP Billiton's way as they move to the point where some agreements switch to spot markets, with some analysts predicting that in the process prices will almost double.
After talking to Rio Tinto iron ore boss Sam Walsh last week, English investment bank Liberum Capital is forecasting Australian miners will get a 95 per cent price increase for the Japanese financial year that began on April 1.
"It is very clear they (Rio Tinto) are confident of achieving a result this year in clawing back some of the freight differential in their contract settlements," Liberum analysts Michael Rawlinson and Nicholas Pickens wrote after talking to Mr Walsh during an investor presentation in London last week. The forecast is bigger than gains most analysts are predicting and outweighs expectations of increases of about 85 per cent from the likes of Goldman Sachs JBWere and Citi.
Iron ore negotiations between the big Australian miners and Asian steel mills have dragged on as Rio Tinto tries to squeeze a bigger gain than the 65 per cent increase secured by Brazil's CVRD. Rio argues, as BHP has done unsuccessfully in the past, that Asian mills should pay more for Australian ore because freight costs paid by the mills are less than those for Brazilian ore.
"We have assumed they will get a quarter of the 2007 freight rate differential, which would imply an 85 per cent gain" on last year's prices, Citi analyst Alan Heap said. "It's not impossible they could get more than that" as the market has shown no signs of softening, he said, though he had seen no evidence to support a 95 per cent rise.
Talks between China and Australia should end by the end of the month, China Iron & Steel Association chairman Zhang Xiaogang said this week.
After June 30, some contracts have the option of being dissolved, allowing miners involved to tap booming spot markets and forcing mills to pay more.
Rio and BHP refused to comment on the talks.
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