Rio Tinto Wins 85% Increase in Contract Prices

Submitted by Craig Strzelecki on 24 June, 2008 - 10:18

What can be termed as one of the biggest achievements, Rio Tinto has bagged a record 86 percent hike in iron ore contract prices. The hike includes freight premium with China's biggest steel maker, Boasteel. Shipping iron ore from China is cheaper than from Brazil. This has led to higher iron ore contract price between Rio Tinto and BHP Billiton against Rio de Janeiro based Vale.

The contract prices for lump iron ore witness 96.5 percent and 79.8 percent for fine iron ore amounting to average hike of just under 86 percent. This deal clearly sent message across the world that the steel prices shall remain high in coming months and increase concerns about inflation. Moreover, steelmakers that have purchased iron from Rio Tinto and BHP would have to write a difference check which would mean billions of dollars for the company. This would eventually squeeze out profit margins from the books of steelmakers across the globe. Steelmakers especially from China have also raised their concerns that the merger of Rio Tinto with BHP Billiton would further hand over larger pricing power to too few suppliers.

The new contract prices are expected to result in 9 percent change in Rio Tinto's earnings and 3.5 percent change in BHP Billiton's earnings. This is the first time that Chinese buyers have agreed to pay more for Australian ore than supplies from Brazil owing to the fact that it is cheaper to ship from Australia rather than Brazil. The higher prices for iron ore shall now enable Rio Tinto to become stronger and prevent itself from a hostile take over by stronger BHP Billiton Ltd. which is the largest mining company in the world. Rio Tinto is currently the second largest exporter of iron ore across the world while Brazil based Cia Vale do Rio Doce being the largest exporter.

Demand for iron ore remains very strong as the demand for steels continues to head north. This spells into more profitability for Rio's iron ore business. Last years 9 percent increase in iron ore prices was effectively wiped out by strengthening of the Australian dollar against the US dollar. Iron ore exports volume is expected to reach 18 percent while coking coal would witness a gain of 7 percent.