BHP, Rio Tinto, Vale May Increase Iron Ore Prices 30% (Update1)...

BHP, Rio Tinto, Vale May Increase Iron Ore Prices 30% (Update1)

By Tan Hwee Ann and Helen Yuan

Sept. 27 (Bloomberg) -- Cia. Vale do Rio Doce, Rio Tinto Group and BHP Billiton Ltd., the world's three largest iron-ore exporters, may increase prices by 30 percent next year as demand driven by steelmakers in China outpaces growth in supply.

Prices for benchmark shipments from Australia will rise to a record $66.40 a ton next year from $51.47 in 2007, according to the median forecast of eight analysts surveyed by Bloomberg. Sales may climb 11 percent this year as supplies gain 8 percent, Merrill Lynch & Co. estimates. Mining companies and customers begin annual contract talks next month for shipments from April.

Chinese steelmakers, the biggest consumers, are raising production 15 percent to meet demand for cars, railroads and buildings. The increase will provide record profits for mining companies and may help Brazil's Vale double earnings from iron ore by 2009, according to Citigroup Inc. research.

``It's a sellers' market,'' said Peter Chilton, who helps manage the equivalent of $1.4 billion at Constellation Capital Management in Sydney.

Iron-ore mining companies won't expand fast enough to keep up with growth in consumption for years, so prices will rise until 2010, according to Paul Gray, a commodities analyst at Goldman Sachs JBWere Pty in Melbourne.

China, which buys almost half the world's traded iron ore, may import 25 percent more this year, Goldman said. Vale, London-based Rio and BHP in Melbourne account for about 75 percent of global iron-ore exports.

`Very Tight'

``The market is very tight,'' Marius Kloppers, who will become chief executive officer of BHP next month, said on Sept. 12. Tom Albanese, his counterpart at Rio Tinto, described the iron-ore market as ``very, very strong,'' in a Sept. 25 UBS AG report.

Steelmakers can afford to pay more by boosting prices for their products. Coils of hot-rolled steel, used in car bodies and washing machines, have risen 11 percent in the past year to $590 a ton in Antwerp, the highest since April 2005, according to Metal Bulletin. ArcelorMittal, the world's biggest steel producer, said Aug. 1 that profit rose 50 percent to $2.72 billion in the second quarter. Nippon Steel Corp., its closest rival, expects to post a second annual record profit in 2007.

This year's iron-ore market caught analysts at Goldman, JPMorgan Chase & Co. and UBS by surprise. Goldman and UBS said in December that prices would be little changed at best, and JPMorgan anticipated a 10 percent cut as recently as March.

``The marginal tonnage is proving hard to get,'' said Tim Barker, who helps manage and advise on $54 billion of assets at BT Financial Group in Sydney.

India's Restriction

Prices for individual iron-ore cargoes, which include shipping costs, have risen to $165 a ton, according to Credit Suisse Group. It takes 1.6 tons of ore to make a ton of steel.

India, which accounts for 14 percent of world supply, aggravated the global shortage in March by increasing export taxes to ensure adequate domestic supplies. Australia and Brazil each account for 36 percent of globally traded ore, according to Citigroup.

Vale's income from iron ore may almost double to $14.2 billion by fiscal 2009 from an expected $7.7 billion in 2007, Citigroup estimated.

China overtook Japan as the largest buyer of iron ore in 2003, and last year the country's biggest steelmaker Baosteel Group Corp. set global benchmark prices for the first time. It agreed to a 9.5 percent gain, the smallest increase in four years.

``Baosteel has improved negotiating skills in the past years, but the price will be decided most by the supply and demand,'' Chen Xianwen, deputy director of market research at the China Iron & Steel Association, said on Sept. 19.

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