The world’s iron-ore reserves are mainly controlled by three mine operators: Rio Tinto and BHP Billiton in Australia and the Brazil-based Vale group. On Monday evening Rio announce that price increases of as much as 96.5% had been contractually agreed with China’s largest steel producer Baosteel.

‘This all means extremely good business for Rio’, said an industry expert in London. There have also been reports in the media that the world’s second largest producer, Japan’s Nippon Steel, along with other Japanese producers, have now agreed with Rio to a 200% price rise for the trading year 2008/09. Nippon has refuted this and has stated that talks are still ongoing.

Earlier in the year Vale imposed price increases of between 65 and 71% on its Chinese market. Rio and BHP argue that their higher demands are justified because Asian customers have to pay substantially less freightage for ore from Australia than for supplies from Brazil, for example.

Like its competitor, the South-Korean steel producer Posco, German-based ThyssenKrupp (TKAG.DE) has announced that it would be increasing its prices because of the increasing cost of raw materials. In its latest round of negotiations the Düsseldorf company has had to accept average price rises of around 65%. Finance director Ulrich Middelmann stated that in the current trading year the group would not fully be able to offset the higher materials costs.

About two tonnes of raw materials – mainly iron ore and coking coal – are required to produce one tonne of steel. As there are relatively few mine operators, even large steel companies find themselves in a weak bargaining position. ThyssenKrupp and Salzgitter have no mines of their own and do not possess significant holdings in any mining operations. In 2001 ThyssenKrupp sold its Brazilian ore mining subsidiary Ferteco to CVRD, now Vale. According to Middelmann the high prices have meant that there is now no going-back. Iron ore, coal, nickel and chromium mines can hardly be bought at any price.

In Asia the shares market came under pressure on Tuesday as a result of concerns about price rises. The Tokyo steel index fell 1.9 percentage points. Nippon Steel lost 2.5%. Even car makers like Toyota were affected. In Frankfurt the weak market meant that automotive stock was quoted at as much as 3% blow normal. Europe’s largest car maker, Volkswagen, said that the increasing price of raw materials would put the company under greater strain. The group was now stepping up its efforts to save on materials costs, but this economy drive was unlikely to compensate for the current price demands of the market.

Like other car makers VW is to some extent protected from price fluctuations by way of long-term contracts. However, when these agreements expire the suppliers are able to force through higher prices. BMW has confirmed reports from May 2008 that its operating costs would increase by as much as 12% as a consequence of rising market prices for raw materials. In 2007 the higher steel and aluminium prices cost the Munich-based group an additional € 288 million. ‘Customers are not particularly keen on buying cars at the moment so it will be hard to pass on the additional costs’, according to stock dealer Matthias Melms of NordLB. Yet Europe has not been as hard hit as Asia, since companies here have been buying-in cheaper Australian ore.

The industry is now making efforts to move away from the practice of signing supply contracts one year in advance. Critics claim that the current system in the multi-billion-dollar market is far too lacking in transparency. Talks are now under way on a common framework for short-term trading. However, there are concerns here that prices could be distorted by speculators and hedge funds. BHP chief executive Marius Kloppers has promised to introduce greater transparency into future contracts. He claims that the company is not interested in selling on the spot market but would conclude agreements based on near-market conditions.

rbo/aos/jcs/rtz

2008-06-24 13:52:38 GMT (Reuters)