iron ore talks between steel mills and produce

Iron ore talks between steel mills and producers led by Vale do Rio Doce may enter 2008
By Jesse Riseborough Bloomberg NewsPublished: November 22, 2007



MELBOURNE: Annual iron-ore contract talks between steel mills and producers led by Vale do Rio Doce may not be settled until the second quarter of next year after a jump in cash prices, Goldman Sachs JBWere said.

Rates for individual shipments of the commodity from India have almost doubled over the past five months, two Goldman analysts, Malcolm Southwood and Paul Gray, said Wednesday in a report. Contract prices could rise more than 50 percent, they said.

Vale, Rio Tinto and BHP Billiton started talks this month with steel makers in Asia for 2008 benchmark prices, which will start from April 1 and last 12 months.

Baosteel, the biggest steel maker in China, and Vale agreed to a 9.5 percent gain in near-record time on Dec. 21 last year, Goldman said.

"With hindsight this was a generous outcome for the buyers," the analysts said. "We anticipate a more protracted negotiation process this year, an agreement may not be reached until the second quarter of 2008."

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Chinese steel makers and Vale, the biggest iron ore exporter in the world, are "far apart" on how much contract prices will have to rise, the Brazilian company's iron-ore chief, Jose Carlos Martins, said last month.

BHP Billiton's $125 billion rejected bid for Rio earlier this month is likely to affect negotiations this year, ABN AMRO said Wednesday. A combined BHP-Rio would challenge Vale as the largest producer of the ore used to make steel.

The proposal "would see the combined group match Vale in the seaborne freight market and then exceed it as capacity expansions are carried out," ABN analysts led by Warren Edney wrote. "This proposal has somewhat overshadowed the price negotiations and we have no doubt it will have some impact."

Iron ore demand from China, which produces a third of the steel in the world, has sent contract prices up threefold in the past five years. Sales will continue to grow at 10 percent a year for at least the next three years, helping raise prices, said Goldman, whose base forecast for next year is a 30 percent gain.

Surging steel output in China, which imports almost half of global iron ore exports, will result in a 50 percent increase in contract prices, Macquarie said Monday in a report.

Global steel output is rising at about 17 percent annually, which will support an increase of 35 percent next year, Credit Suisse analysts led by Roger Downey said Nov. 8 in a report, raising its estimate from 25 percent.

"Despite the tight market conditions, we expect tough, drawn-out negotiations," Credit Suisse said. "The level of the increase will be determined effectively by the ability of steelmakers to pass on additional costs, totally or partially, through steel prices."