New Negotiated Iron Ore Prices For Rio Tinto

Rio Tinto has completed successful negotiations with Baosteel to hike iron ore prices. Baosteel represents Chinese steel mills. The price increases averaged 85% and were argued in part due to increased freight premiums that are necessary to reflect rising transportation costs driven by higher oil prices. China imported 383 million tons of iron ore in 2007, up 17.4 percent from 2006. Analysts are looking for another 1.5 years or so of additional price increases. A CNBC International video discusses the recent price hikes and their effects on the industry. Given that iron ore is cheaper to ship from Australia as compared to Brazil (from Vale), and market prices are continuing to rise, Baosteel really had no other choice.

Given increased transportation costs, it is unclear exactly how much this price increase may add value to Rio Tinto, although a Agence France-Presse article states, "The deal was "very significant" as iron ore is one of the three main drivers of Rio Tinto's earnings, along with copper and aluminum, a Rio Tinto spokesman said." Nonetheless, even if the deal did not directly affect the bottom line, it should at least give Rio some leverage against BHP Billiton's takeover attempt of the company and may force them to up their offer. Rio is a bigger producer of iron ore than BHP, and the recent negotiations illustrate Rio's ability to drive the market price of iron ore. As of now, companies set the price of iron ore in individual negotiations, although the exchanges are looking at offering iron ore contracts in an over the counter (OTC) swaps market, or even a futures market. BHP has already expressed interest in such markets given that it will allow them more ability to take advantage of higher spot prices on a daily basis, without needing to lock into long-term contracts, or renegotiate as prices move significantly.

While individual investors cannot yet invest directly in iron ore futures, they can purchase a few companies that mine and sell iron ore, such as Rio Tinto (RTP), BHP Billiton (BHP), and Vale (RIO), and can also invest in those companies that are demanding the iron ore - the steel makers, such as POSCO (PKX), ArcelorMittal (MT), U.S. Steel (X), and Nucor (NUE). While there is still concern of a global slowdown, demand for steel and the materials that are used for its production, as least in China, are still strong.