Japan steel mills join China over Rio's iron priceing June 24, 2008
NIPPON Steel and other major Japanese steel mills are the latest to accept Rio Tinto's demand for a big increase in iron ore prices.
Rio Tinto yesterday succeeded in its quest to secure from China a freight premium for Australian iron ore, locking in the biggest-ever rise in contract prices for Australia's most valuable commodity export.
Shares of Rio Tinto were up 2.04 per cent at $140.39 by late afternoon. The benchmark S&P/ASX 200 was up 0.13 per cent.
Japan’s Nikkei newspaper, citing company sources, reported today that Japanese steel mills had agreed to a 100 per cent increase in prices of Australian iron ore in fiscal 2008.
Steelmakers in Japan are likely to ask their main customers to accept additional hikes in prices of steel products because the latest decision is expected to push up their procurement costs for iron, the key material for steel products.
Japan’s five major steelmakers - Nippon Steel, JFE Steel, Sumitomo Metal Industries, Kobe Steel and Nisshin Steel - are expected to officially accept the hikes this week.
The domestic steelmakers are also likely to agree to similarly large price increases for iron ore supplied by BHP Billiton, another Anglo-Australian mining group.
On the China deal, Rio (ASX: RIO: quote) settled on an average price rise of 85 per cent for iron ore it sells to Chinese steel mills, which were led by Baosteel in the negotiations, beating the 71.5 per cent increase secured in 2005.
The huge hike in prices for the nation's most valuable commodity export will probably be closely followed by BHP Billiton (ASX: BHP: quote) and set a new Australian benchmark that will flow on to smaller producers.
Rio chief executive Sam Walsh said today the company was pleased to reach the agreement with China, which reflects the continuing demand in the market for Hamersley’s products.
“The agreement builds on the valuation premium for Rio Tinto’s Pilbara iron ore business, the importance of which is highlighted as we move towards our 320 and 420 million tonne per annum goals from our expected capacity of about 200 million tonnes in 2008,” Mr Walsh said.
The Chinese price gains came after Rio and BHP broke with tradition and declined to fall in line after Brazil's Vale secured price gains of 65-71 per cent.
Shares of BHP rose 2.91 per cent to $45.90 late this afternoon.
Rio had argued with the Chinese that Australian iron ore miners were entitled to a higher price than Vale because Asian steel mills were paying a lot less to ship Australian ore as freight rates surged.
Rio, which is defending a $US160 billion takeover bid from BHP, was aggressive in holding out for a freight premium, and chief executive Tom Albanese had recently warned of an "urgent" need to settle before June 30, when some contracts could be suspended and the ore sold on to spot markets at a big premium.
The freight premium equates to $7.43 a tonne over the fines price secured by Vale, which is about half the long-term freight differential between Australia and Brazil but well below premiums of up to $60 a tonne under current freight rates.
It is also the first time different gains have been secured on quality by an Australian miner, and follows the lead set by Vale. It also illustrates the tight market for good quality iron ore as Chinese and Indian steel mills vie for supply.
The 85 per cent price hike was in line with analysts' expectations at Citi and Goldman Sachs JBWere, though in the last couple of months, expectations had grown, with some analysts predicting 95 per cent gains or more.
"It's a good result, and in line with expectations, though part of me is disappointed with the fines number," said one analyst, who declined to be named.
Iron ore exports were valued at $15.9 billion last financial year, more than both coking coal and thermal coal, according to Australia's government forecaster ABARE.
Rio has been playing hard for the price gains this year partly because it has a bigger exposure to moves in iron ore prices than rival BHP and a bigger hike would do more to boost Rio's argument that BHP has not offered enough in its 3.4-for-one takeover bid.
BHP, on the other hand, has stepped back from taking a lead in negotiations, keen not to stoke buyer concerns about its increased share of global iron ore exports if its bid is successful.
ARH Price at posting:
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