Steel firms face 200 per cent hike in coal costs

The price of all things steel, from refrigerators to cars to saucepans, is set to surge after an agreement was struck yesterday that will triple the price of coking coal, the fuel used to make the metal.

The accord between Posco, Asia's third-largest steel maker, and Australia's top miners BHP Billiton and Rio Tinto will push the price for coking coal from the $98 per tonne it cost last year to more than $300 per tonne this year. It is part of a wider trend that has seen most commodities, from iron ore to copper to oil, soar to new heights in the last year as miners struggle to meet overwhelming demand from the industrialising East.

The deal is bad news for consumers. Vale of Brazil, the world's biggest miner of iron ore, the basic component of steel, managed this year to secure an increase of up to 71 per cent for the commodity from Asian steel makers. Once one deal is struck, the rest of the industry usually follows suit quickly. The price of coking coal and iron ore are renegotiated every year. BHP and Rio, because they are closer to China and other major Asian customers, are holding out for even higher price increases for iron ore because the cost of shipping is drastically less. Analysts expect steel makers to pass on as much of these massive price rises to consumers as possible to try to protect their profit margins.

The accord also has implications for the world's largest takeover, BHP's hostile bid for Rio. Tobias Woerner, analyst at MGF Global Securities, said the settlement would be more of a boon to BHP, which produces nearly five times as much coking coal as Rio does. Since BHP launched its offer in November, each side has seized on even the smallest market developments to bolster their arguments. Rio, which produces more iron ore and alumin-ium, has stressed that the massive appreciation in value of those metals means BHP should raise its offer. BHP, on this occasion, trumpeted the coal accord. "Because of the combination of coking coal and manganese and iron ore, we will slightly outperform Rio Tinto if the steel market explodes," said Alberto Calderon, chief commercial officer of BHP.