Rio's Coup: China Settles For 85% Rise In Prices
Sydney Morning Herald
Tuesday June 24, 2008
CHINA's steel industry has caved in to demands for massive increases in contract iron ore shipments from Australia.
News of the settlement emerged in London last night, with Rio Tinto said to have secured a whopping 96.5 per cent increase for "lump" iron ore shipments and 79.88 per cent for iron ore "fines." Across the product range, the price increase - in US dollars - equates to an 85 per cent rise.The bonanza settlement includes a first time recognition that there should be a sharing of the so-called freight advantage Australian iron ore landed in China has over supplies from Brazil.Rio is set to turn the settlement to its advantage in arguing that BHP Billiton's takeover bid for the group remains well short of full value.Rio has been talking tough with the Chinese steel makers, pressing for a bigger increase than was secured in February with the world's biggest iron ore exporter, Vale.Vale secured a 71 per cent increase for its premium Carajas fines product and a 65 per cent increase for its Itabira brand of fines.On a like-for-like basis, the respective settlements mean that Rio has secured an additional $US7.45 a tonne on top of the $US65 a tonne that Vale will be receiving for its fines in China. The premium is a part recoupment of the freight differential between iron ore from the Pilbara and iron ore from Brazil.Earlier this year the freight differential blew out to as much as $US45 a tonne - reflecting the shorter distance from the Pilbara to China and soaring day rates for the world's bulk carrier ships.The Rio settlement heads off the potentially explosive situation where supply contracts for shipments after June 30 could have been redirected to the spot market by Rio at substantially higher prices than currently applies in the contract market.Australia's iron ore producers are already making money hand over fist, with the latest price increase being the sixth consecutive rise and at the higher end of expectations. Rio - which is fighting off a hostile takeover bid from BHP - said earlier this year that a 65 per cent iron ore price increase would boost its annual earnings by a hefty $US2.97 billion ($3.25 billion).BHP is not as big in iron ore as Rio but when its likely profit boost - and that of other iron ore producers - is added in, the combined profit impact for the Australian industry is estimated at more than $5 billion.That is a tax-paid figure, with Canberra's coffers continuing to benefit from the China-led boom in commodity prices. And the Federal Government forecaster is predicting the value of mineral and agricultural exports will jump 40 per cent next year, thanks to record iron ore and coal prices and a window of relief from the drought,The Australian Bureau of Agricultural and Resource Economics yesterday forecast a record $212 billion in commodity exports in 2008-09, compared to its March forecast of $189 billion."The strength of Australia's minerals and energy exports continues to underpin commodity sector performance," the bureau's Karen Schneider, acting executive director, said Australia's exports of minerals and energy are forecast to be $178 billion in fiscal 2009, up from $121 billion a year earlier, the bureau said. The volume of iron ore exports is forecast to rise 18 per cent while coking coal will gain 7 per cent, the bureau said.
© 2008 Sydney Morning Herald