iron ore price to rise next two years on china

Iron Ore Price to Rise Next Two Years on China Demand RBC Says

By Jesse Riseborough

April 25 (Bloomberg) -- The benchmark price of iron ore, a key steelmaking ingredient, may rise for a further two years, making it seven straight increases due to Chinese demand, RBC Capital Markets said.

The price may rise 10 percent next year and 5 percent in 2009 to a record, analysts Chris Lancaster and Michael Chandler said in an April 23 report. The analysts had earlier forecast a 25 percent and 20 percent fall respectively.

Baosteel Group Corp., China's biggest steelmaker, said yesterday it will increase annual purchases of the raw ingredient by 90 percent by 2012 as it expands mills to meet demand from auto and appliance makers. China overtook Japan as the world's largest buyer of ore in 2003.

``We expect the current very tight market conditions to prevail for the next two years on the back of ongoing strong demand, principally from China,'' the RBC analysts said. ``China's appetite for iron ore imports refuses to slow.''

Chinese imports may rise by 15 percent in 2007 as imports in the first three months rose 24 percent, compared with 18.5 percent a year earlier, RBC said.

Cia. Vale do Rio Doce, Rio Tinto Group and BHP Billiton Ltd., who account for three-quarters of the sea-borne iron ore market, are posting record profits because of global demand for their ore. The iron ore price from Rio, the world's second- largest exporter of the commodity, rose 9.5 percent to $51.47 a ton this year, according to Bloomberg's calculation.

India's Tax

India's government announced a tax of 300 rupees ($7.29) a metric ton in February to be imposed on iron ore exports after the country's steelmakers requested the restriction to ensure enough supply of the material to meet domestic needs.

``The tightness currently prevailing in the market is likely to be further exacerbated by the recent introduction of export taxes in India that will likely restrain its exports,'' the analysts said, adding that the tax is equal to a 10 percent increase in price.

Chronic labor shortages experienced by both Rio and BHP in Australia, as well as recent bad weather affecting their operations in the Pilbara region of Western Australia state, will also restrict expansion and constrain supply, RBC said.

Most analysts had been predicting iron ore prices would either fall or stay unchanged in 2008, expecting miners to catch up with demand. That's changed in the past two months amid signs China's demand may be greater than expected.

Goldman Sachs JBWere Pty, Deutsche Bank AG, and UBS AG in the past month also raised their iron ore price forecasts for next year. Goldman expects iron ore to gain 5 percent, instead of a 10 percent fall. Deutsche Bank expects the commodity to rise 10 percent, instead of a 5 percent decline. UBS expects a 10 percent gain, up from unchanged