Mining shares leap on prospect of 90% rise in iron ore prices

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Iron Ore prices could rise as much as 90 per cent this year, it has emerged, sending mining shares soaring yesterday.

Iron Ore prices could rise as much as 90 per cent this year, it has emerged, sending mining shares soaring yesterday.

The price of coking coal for 2005 has already been settled at a 120 per cent gain on last year, in a deal between Australian suppliers and Japanese consumers, at $125 (£66) per tonne.

Now the market is set to record its biggest-ever jump in the price of iron ore. Coking coal and iron ore are the key raw materials required to make steel.

Mining companies that supply these materials dominated the FTSE 100 risers list yesterday, with Rio Tinto adding £748m to its stock market value to close 4.3 per cent higher at 1,690p. BHP Billiton shares gained 2.4 per cent, Xstrata climbed 2 per higher, while Anglo American put on 1 per cent.

The City was reacting to news that the world's biggest iron ore producer, Brazil's Companhia Vale do Rio Doce (CVRD), was seeking a 90 per cent price rise in negotiations with buyers. The commodity, along with coking coal, sees its price settled once a year.

While the price of coking coal was decided before Christmas, suppliers and consumers are wrangling over the price of iron ore for 2005. Patrick Cleary, a research manager at CRU Analysis, a consultancy, said that while CVRD's demand did not mean it would get a 90 per cent increase, it was "very much a sellers' market".

He added: "It [the iron ore price] has never gone up by more than 20 per cent before. This year will certainly see a record increase. We are in uncharted territory."

In 2004, the iron ore price rose by slightly less than 20 per cent, as demand for materials from steel mills raced to keep up with orders for steel.

Last year's rally in mining shares has continued into 2005 on the back of strong commodity prices. Yesterday, several analysts bumped up profits forecasts for leading London-listed miners on expectations that prices would rise even further than previously thought.

In a research note, JP Morgan added about 9 per cent to its earning predictions for BHP Billiton, Rio Tinto and Anglo American. The broker raised its assumed price increase for iron ore from 22 per cent to 35 per cent for this year.

Paul Scott, also of CRU, said despite the jump in the price of iron ore and coking coal, steel prices were not likely to increase. Steel has already doubled in price in the past 12 months. "Margins at steel producers have been ramped up to such an extent that they will be forced to absorb the increase in raw material costs," Mr Scott said.

A surge in demand from China is the primary reason for the jump that has been seen in steel prices. China has struggled to find enough steel to meet the needs of its booming industries.