Record iron ore price increases expected after Vale's Asia deal

Analysts were expecting BHP Billiton and Rio Tinto to secure record increases for iron ore prices this year after Vale, the world's leading supplier, secured hikes of 65 per cent and 71 per cent from leading Asian steel makers.

The annual price-setting talks between the world's leading iron ore producers and their biggest Asian customers have been dragging on for months as the miners lobby hard for major increases to contract prices after a year in which spot prices for the commodity have soared, in some cases by more than 100 per cent.

Nippon Steel of Japan said yesterday that it agreed to a 65 per cent increase to the price it pays for ore from Vale's Itabira mines in Brazil and a 71 per cent jump for higher grade ore from its Carajas complex. JFE, Kobe Steel and Posco of South Korea also signed up to the terms.

Dan Smith, metals analyst at Standard Chartered, said the hikes were "more than most people had thought they would be." He had predicted a jump of around 50 per cent, while the lowest projections had come in at around 25 per cent. Usually the first agreement that is unveiled between Vale and one of the main Asian steelmakers serves as a benchmark for the rest of the industry, which then quickly follows suit.

Rio Tinto Iron Ore president Sam Walsh said yesterday, however, that "discussions are continuing" with steel makers on a settlement and that he would seek to secure a premium to reflect freight costs that are less than half of what it costs to ship the stuff from Brazil to Asia. Analysts speculated that the world's third-largest miner was holding out for prices near the top end of the range reached by Vale.

Vicky Binns, an analyst with Merrill Lynch, said: "Although the grade of Australian iron ore is, on average, marginally below that of Vale's – Australia's producers will probably attempt to capitalise on the seaborne market's current extreme tightness in order to secure price terms similar to those of Vale's Carajas deal."

While the massive increases will benefit both BHP and Rio Tinto, the latter would see greater upside as iron ore generates nearly a third of its profits. BHP derives about 15 per cent of its profits from the business.

ArcelorMittal, the world's largest steel producer, has been buying mining assets around the globe to minimise its exposure to prices being pushed up, principally by the building boom in China. The world's most populous nation is adding nearly 50 million tonnes of steel capacity every year, equivalent to the entirety of the German industry.

The world's big three iron ore suppliers have been locked in talks with Baosteel, China's biggest steel group. Now that the Japanese and Koreans have secured deals, analysts expected Baosteel to agree terms shortly. The new terms come into effect from 1 April, and will have wide-ranging consequences on other steel-intensive industries, such as automobiles and shipping.