Rio Tinto secured a record 85 per cent increase yesterday to the price that China, it biggest customer, pays for its biggest product, iron ore, underlining China's desperation to secure raw materials to fuel its industrialisation and stoking fears that global inflation will continued unabated.
The price agreements, struck with China's state-owned steel group Baosteel, also bolster Rio's case for rival BHP Billiton to increase the price of its hostile bid or walk away. The settlements – separately, they imply a 96.5 per cent rise to the price of lump iron ore, and a 79.9 per cent hike to the price of fine iron ore – nearly doubles the price the Chinese will pay for the main ingredient of the industrialisation.
Deals on similar terms are expected soon from BHP, which has been holding separate negotiations with representatives of the world's biggest consumer of raw materials. Analysts said that the price hike is better news for Rio, as it relies far more on iron ore for its earnings. Rio derives nearly a third of its total earnings, 29 per cent, from the ore, while for BHP it accounts for just 14 per cent.
Both companies have been locked in negotiations for months with Chinese steelmakers, led by Baosteel. They have been holding out for increases well beyond the 71 per cent and 65 per cent that were won earlier this year by Vale, their Brazilian rival and the world's largest iron ore miner. The premium is due to much lower freighting costs thanks to the the proximity of their mines to China relative to those in Brazil.
Based on past calculations published by Rio, the 85 per cent increase could mean a massive $3.8bn increase in annual earnings for the mining giant, piling pressure on BHP to come up with a better offer. The company has already improved its bid once and has signalled that it won't budge beyond the standing 3.4 to 1 all-share offer that would forge the world's first mining super-major. It recently filed the first round of documents with the European Commission, the antitrust watchdog, part of a labyrinthine process with regulators around the world that is expected to take at least the rest of the year.
Marius Kloppers, the chief executive of BHP, said yesterday that he was confident that not only would the deal be approved but that the combined entity would not be forced to divest any assets as a condition for approval. "The main test that the [European Commission] uses is the concept of economic harm," he said. "The main result of this combination would be an acceleration of volume to the market. We could argue there is economic benefit."
Mr Kloppers dismissed the concerns voiced by customer groups, among them steelmakers, who worry that the company would be a "virtual monopoly" in several key commodity areas.Reuse content