Miners revel while steelmakers reel on iron ore price
Wednesday February 23, 2005, 7:33 pm
By James Regan
SYDNEY, Feb 23 (Reuters) - Mining companies may well be grinning at the expense of their steel-making customers on the prospects of soaring iron ore prices after Japan's Nippon Steel Corp. 5401.T agreed to a 71.5 percent price hike with producers in Australia and Brazil.
Analysts have been quick to rejig profit estimates for miners in anticipation of similar settlements in the sale of the key ingredient of iron ore to a steel industry booming on the back of strong demand from China.
The increase negotiated separately by Companhia Vale do Rio Doce VALE5.SA RIO.N and Rio Tinto Ltd./Plc. (ASX: RIO.ax) RIO.L could act as a benchmark as steelmakers gear up for annual record production set to exceed last year's 1.05 billion tonnes.
"This is a very important year for iron ore miners," AME Mineral Economics steel analyst Dallas Horadam said.
Australia's mining giants of BHP Billiton Ltd./Plc. (ASX: BHP.ax) BLT.L and Rio Tinto Ltd./Plc. are seen benefiting most from a hike in prices, which would vindicate decisions to spend billions of dollars digging new outback mines.
For steel makers from China to South Korea, it would mean their biggest cost blow outs in more than 50 years.
Each one percent rise in iron ore prices adds about $14 million to Rio Tinto's bottom line. Every $1 rise adds about $60 million to BHP Billiton's profit.
Analysts said that if the agreement for shipments between April 1, 2005 and March 31, 2006 is adopted industry wide, it would undermine a hard fought 8 percent rise steel price mills won from their customers in January.
CHINA WOES
"The new price is very high," said steel analyst Xu Aihua, of Chinese metal consultancy Antaike.
"Chinese steel firms could try to buy more domestic iron ore, but the problem is that the grades are generally lower," she said.
China's largest steel maker, Baosteel 600019.SS, indicated before the agreements it was ready to accept price hikes of only around 30 percent. On Wednesday it raised steel prices by 10 percent due to strong demand.
Chinese steel mills, like most across Asia outside Japan, have not taken a leading role in the negotiations. Instead, they accept prices hammered out by their Japanese rivals.
Iron ore miners argue big increases are justified, given a paltry 18.6 percent rise last year amid the biggest boom in steel making in decades.
The hike means steel mills will pay on average $80 a tonne for ore in the next shipping year, up from $46.65.
Demand for iron ore has never been stronger, owing largely to China, which alone has added enough new steel-making capacity since 2001 to match the entire U.S. steel sector.
The International Iron and Steel Institute says world crude steel production rose 8.8 percent to a record 1.05 billion tonnes in 2004. Excluding China, world output was up 4.5 percent.
"This price increase reflects unprecedented demand for our products, driven by the continuing growth in steel consumption, particularly in China," Rio Tinto's iron ore group chief executive, Sam Walsh, said.
The deal, announced by CVRD on Tuesday, enraged its main customer, European steel producer Arcelor CELR.PA, which said in a statement that it did not consider the settlement "a benchmark for 2005 contracts".
Steel analysts, however, said the company was likely to give in sooner or later.
Japan's steel makers want to reach quick deals with miners to assure their customers there will be enough steel to go around, averting a repeat of last year, when a shortage forced Japanese auto makers, including Nissan Motors Co. 7201.T, to cut production.
"A rise of at least 50 percent to 70 percent was largely expected so the agreement at 71.5 percent really didn't surprise us," said Kazuhiro Harada, senior analyst at Mitsubishi Securities.
Mitsubishi Heavy Industries Ltd. 7011.T, Japan's biggest machinery maker, has already more than halved its profit outlook to 10 billion yen ($95.8 million) for the year ending March 31, citing higher steel prices and a supply shortage. |
