Miners digging in for good times

Mining companies may well be grinning at the expense of their steelmaking customers on the prospects of soaring iron ore prices after Japan's Nippon Steel agreed to a 71.5 per cent 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 (CVRD) and Rio Tinto 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," said AME Mineral Economics steel analyst Dallas Horadam.

Australia's mining giants BHP Billiton and Rio Tinto are expected to benefit most from a price rise, which would vindicate decisions to spend billions of dollars digging new Outback mines.

For steelmakers from China to South Korea, it would mean their biggest cost blowouts in more than 50 years.

Each 1 per cent rise in iron ore prices adds about US$14 million ($19.29 million) to Rio Tinto's bottom line. Every US$1 rise adds about US$60 million to BHP Billiton's profit.

Analysts say if the deal for shipments between April 1 this year and March 31 next year is adopted industry wide, it will undermine a hard-fought 8 per cent rise steel price mills won from customers in January.

"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."

China's largest steelmaker, Baosteel, indicated before the agreements it was ready to accept price hikes of only around 30 per cent. On Wednesday it raised steel prices by 10 per cent 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 boosts are justified, given a paltry 18.6 per cent rise last year amid the biggest boom in steel making in decades.

The hike means steel mills will pay on average US$80 a tonne for ore in the next shipping year, up from US$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 US steel sector.

The International Iron and Steel Institute says world crude steel production rose 8.8 per cent to a record 1.05 billion tonnes last year. Excluding China, world output was up 4.5 per cent.

The deal, announced by CVRD on Tuesday, enraged its main customer, European steel producer Arcelor, which said 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 steelmakers want to reach quick deals with miners to assure their customers that there will be enough steel to go around, averting a repeat of last year, when a shortage forced Japanese car-makers, including Nissan Motors, to cut production.

"A rise of at least 50 per cent to 70 per cent was largely expected so the agreement at 71.5 per cent really didn't surprise us," said Kazuhiro Harada, of Mitsubishi Securities.

Mitsubishi Heavy Industries, Japan's biggest machinery maker, has already more than halved its profit outlook, citing higher steel prices and a supply shortage.

UBS Warburg has lifted its 2005 earnings forecast for Rio by 12.5 per cent, based on the new iron ore price. UBS said BHP's earnings would rise by 2 per cent if it followed suit.

- REUTERS