Australian iron producer secures big price hike
Updated
The share price of China's largest steel maker, Baosteel tumbled after it announced it will pay almost double for iron ore this year. Baosteel shares fell by almost 8 percent, against a rising trend in the market index on Tuesday. The price of iron ore supplied by Anglo-Australian miner Rio Tinto will jump on average by 85 per cent after tough negotiations wound up this week. The increased price is expected to flow onto the other major supplier, BHP-Billiton and is certain to contribute to rising inflation in both China and Australia.
Presenter: Karon Snowdon
Speakers: Brian Redican, Senior Economist with the Macquarie Group; Tim Gerrard, Senior Mining Analyst with Austrock Brokers
SNOWDON: The big jump in prices is a sign if any was needed of the boom in demand in China for steel and its raw ingredients and of the boom as a result in Australia's resources sector.
But it didn't come easily. Chinese negotiators resisted until the 11th hour in negotiations described in trade publications as tough.
Tim Gerrard is the Senior Mining Analyst with Austrock Brokers.
GERRARD: And the Chinese are so short of iron ore, that means that Rio Tinto and also BHP, they had a lot of leverage with regard to holding out for the highest price possible. So this year was always going to be a very large increase.
SNOWDON: The Chinese held out as long as they could against a demand that the price also compensate for the lower freight costs from Australia compared to Brazil, the world's biggest exporter of iron ore.
The Australian mining companies have complained they get paid too little as a result, by as much as 60 dollars a tonne.
The premium for the freight differential is thought to be a small part of the total price, but could be the thin edge of the wedge in future negotiations.
That's despite Baosteel saying in a statement the agreement maintains the traditional pricing structure in friendly negotiations.
Tim Gerrard.
GERRARD: I think that's right, that's the thin edge of the wedge and going forward, they will be able to make more allowances for the freight rate differential. At least it is now built into the contract.
SNOWDON: And as usual, is this the price centre setter for BHP as well. Will BHP be getting the same price?
GERRARD: Probably.
SNOWDON: Do you think it will have any impact on BHP's takeover bid for Rio Tinto?
GERRARD: Look, look not really. We have been estimating a 71 per cent increase in the iron ore price and for Rio Tinto and depending on the type of product, it's now anywhere between 80 per cent increase and 95 per cent increase. The result of that is to lift our earnings about on a full year basis about 900 million dollars.
SNOWDON: For Rio?
GERRARD: For Rio Tinto, 900 million US after tax and on a full year basis for BHP it's about 500 million. So hey, it's handy for Rio to have, but on the other side of the coin, BHP's doing very, very well on its oil business. There will be upgrades there and upgrades on the coking business. So net-net, I would not see a big difference in BHP and Rio's relative position.
SNOWDON: The higher price will flow to Japanese steel makers who are yet to finalise their supply contracts.
The miners are digging up as much of the base metal as they can and there's a rush from Asian companies to buy into Australia's resource sector, as Chinalco did in February - buying 19 per cent of Rio.
The huge volumes and profits will add billions of dollars to Australia's export earnings this year.
They will also contribute to inflation pressures in China and Australia.
Brian Redican is the senior economist with the Macquarie Group.
REDICAN: What we're seeing at the moment is a very broad based increases in commodity prices as well as other costs such as food and labour costs as well.
SNOWDON: Will that increase the likelihood of an interest rate increase here in Australia sooner rather than later?
REDICAN: Well, the Reserve Bank has made it clear that it sees this very big increase in commodity prices as probably its most challenging aspect of reining back inflation. So it will be watching very closely the impact over the next couple of months to see if we do get a bounce back in consumer spending because that would definitely imperil the inflation target into 2009 when the Reserve Bank is hoping that those inflationary pressures are starting to abate.
