A big chunk of change
TAKING advantage of soaring Chinese spot prices, mining giant Rio Tinto has been successful in its quest to secure a freight premium for Australian iron ore, locking in the biggest-ever rise in contract prices for Australia's most valuable commodity export.
Rio (ASX: RIO: quote) settled on an average price rise of 85 per cent for iron ore it sells to China's steel mills, who were led by Baosteel in the negotiations, beating the 71.5 per cent increase secured in 2005.
The huge hike in prices for the nation's most valuable commodity export will probably be closely followed by BHP Billiton (ASX: BHP: quote) and set a new Australian benchmark that will flow on to smaller producers.
Rio announced late yesterday it secured a 79.86 per cent price rise for benchmark iron ore fines and a 96.5 per cent hike in better quality lump, for an overall 85 per cent gain.
The gains came after Rio and BHP broke with tradition and declined to fall in line after Brazil's Vale (formerly CVRD) secured price gains of 65 per cent to 71 per cent.
Rio chief executive Sam Walsh said the company was pleased to reach the agreement, which reflects the continuing demand in the market for Hamersley’s products.
“The agreement builds on the valuation premium for Rio Tinto’s Pilbara iron ore business, the importance of which is highlighted as we move towards our 320 and 420 million tonne per annum goals from our expected capacity of about 200 million tonnes in 2008,” Mr Walsh said.
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The freight premium equates to $7.43 a tonne over the fines price secured by CVRD, which is about half the long-term freight differential between Australia and Brazil but well below premiums of up to $60 a tonne under current freight rates.
It is also the first time different gains have been secured on quality by an Australian miner, and follows the lead set by Vale. It also illustrates the tight market for good quality iron ore as Chinese and Indian steel mills vie for supply.
Obviously the price of iron ore is not the sole determining factor for the price of finished steel. And if we're talking about imports, then even the price of steel is not the final factor, if you know what i'm saying about exchange rates. Nevertheless, it would appear likely that steel imports into the US over the next couple of years are going to be significantly more expensive than the past couple of years.