Steel deals: Rio Tinto wins 97% price hike

Tuesday 01 July 2008

One of the world's top miners, Rio Tinto, has clinched a deal with Asia's steelmakers under which they will pay up to 97% more for iron ore, a major component of steel. The agreement shows how surging demand is changing the way miners do business.

If you’re mad about rising prices and have an axe to grind, you could do worse than vent your spleen on the world's three biggest mining companies.

 

A triumvirate of powerful miners controls a large share of the world’s production of steel’s major component, iron ore.

 

But their real influence stems from their ability to almost single-handedly determine the going global rate for iron ore in annual negotiations with their customers.

 

Back in February, the top producer among the trio, Brazilian miner Vale do Rio Doce, got Asia’s steelmakers to agree to a 65% increase in the price it charges them for iron ore.

 

But now its Anglo-Australian rival, Rio Tinto, has upped the ante by clinching up to a 97% price hike. The Rio deal, in turn, has raised the stakes for fellow Anglo-Australian miner, BHP Billiton, as it pursues its own price negotiations with Asian steelmakers.

 

BHP (which has tabled a $160 billion hostile buyout offer for Rio Tinto that could upend the industry if successful) reportedly believes Rio’s price is too low if one accounts for shipping costs. Meanwhile, according to Bloomberg Business News, China’s steel mills are likely to hold out against any price increase that goes beyond the Rio Tinto deal.

 

All of this is testament to the ways in which surging iron ore demand – driven largely by China’s ravenous appetite for steel for infrastructure, factory equipment and automobiles - is changing the industry’s dynamic.

 

China, as a country, is the world’s top iron ore producer, with more than 500 million metric tonnes in 2006 – but that is still not nearly enough to meet its seemingly insatiable needs.

 

Iron ore prices have risen exponentially in recent years, almost quintupling in price since 2000. And it’s not just China driving the upward trajectory. Bloomberg reports that Japan’s demand for crude steel is likely to rise to an almost 35-year high this quarter, and that Nippon Steel has already increased prices by 40% for contracts to domestic shipbuilders and machinery makers.

 

But what’s really groundbreaking here is how the industry itself is breaking ranks. Time was – up until last year, in fact – when one company would negotiate a price that would then apply across the entire sector. But this year we’re seeing the major miners take matters into their own hands and secure their own deals in a contest of one-upmanship.

 

The repercussions are not likely to be long in coming. The world’s number-one steelmaker, Arcelormittal, already says it will hike its prices by 60%.

 

Carmakers will take the full brunt of the increases, steel being a major component of any vehicle.

 

France’s Le Figaro daily, citing Credit Suisse bank, says that rising steel costs could add an average 200 euros to the price tag of a vehicle in 2009. The paper reports that Renault raised its prices 1.5% in June, while in Japan, Nissan and Toyota could hike their prices by as much as 3%.

 

Consumers should probably steel themselves for worse to come.