China faces twice the ore price hikeFrom: By Andrew TrounsonMay...

China faces twice the ore price hike
From: By Andrew Trounson
May 19, 2006
CHINA has been left fighting virtually alone after Japan's steel mills yesterday accepted another big hike in iron ore prices this year, double the increase Beijing is contemplating.

Rio Tinto joined Brazil's CVRD in announcing the Japanese had accepted a 19 per cent increase in the price of iron ore fines, or powder, in line with CVRD's deal earlier in the week with German steel mill Thyssen Krupp. But the Japanese are believed to be holding out for a slightly smaller rise for premium lump iron ore.
By late last night BHP Billiton had not announced a settlement but was expected to win a similar increase.

BHP last year incurred the wrath of both China and Japan by unsuccessfully demanding an extra premium on its prices to reflect the cheaper cost of freight from Australia relative to Brazil.

The price of Rio's Hamersley iron ore fines to Japan has increased by $US7.50 to $US47 a tonne. A similar 19 per cent increase would raise the price of lump iron ore by $US9.58 to $US59.99 a tonne. But the Japanese could be demanding that the increase be limited to $US7.50 as for fines, which would imply a 14.8 per cent rise in lump to $US57.91.

The Chinese had been seeking to lock miners into a two-year deal under which any increase would be recouped by a corresponding price decline in 2007-08. But with some analysts tipping prices to remain strong for the next year, or even two, as mine supply struggles to expand in time with demand, there was little incentive for miners to accept such a deal.

Having fought so hard to take control of these negotiations away from the traditional price setters in Japan and Europe, Beijing will be bitter at the outcome, but China is expected to grudgingly accept the increase.

If not, it risks having to pay higher prices on the spot market. Spot prices are driven by Indian export prices that are supported by an export tax imposed by Delhi to sustain iron ore reserves for its own steel industry.

"I think the ground they are standing on is getting weaker by the hour as these settlements come in," ABN AMRO resources analyst Robert Clifford said.

ABN AMRO had forecast a 10 per cent price rise, and Mr Clifford now expects to raise his earnings forecasts for BHP and Rio Tinto by 2 per cent and 3 per cent respectively.