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China agrees to 96% jump in iron prices -- as gold falls

Section: Daily Dispatches

By Javier Blas and Rebecca Bream
Financial Times, London
Monday, June 23, 2008

Global inflation fears deepened as Chinese steelmakers agreed to a record increase in annual iron ore prices in a move likely to boost the cost of cars, machinery, and other products.

Chinese millers agreed to pay Anglo-Australian miner Rio Tinto up to 96.5 per cent more for their ore supplies this year, the largest-ever annual increase and well above the 9.5 per cent increase paid last year.

The rise suggests that demand for commodities from emerging economies remains strong, in spite of the US slowdown, fuelling fears that global inflation will continue to rise. The rise -- an average 85 per cent -- surpasses the record increase of 71.5 per cent agreed in 2005, when the commodities  boom gathered pace.

"Commodity-led inflation risks appear to be growing," said Tobias Levkovich, Citi chief strategist.

Sam Walsh, chief executive of Rio’s iron ore unit, told the Financial Times on Monday that the agreement indicated ongoing robust demand for commodities. "Economic growth in China, India, and the Middle East continues to be outstandingly strong."

Analysts said steelmakers are likely to pass the rise in costs on to customers, such as construction companies and car makers.

Marius Kloppers, chief executive of rival miner BHP Billiton, which is in the middle of a hostile takeover battle for Rio, pointed to strong demand in the steel sector. "The steelmakers live in unprecedented times," Mr Kloppers said. "The margins for steelmakers have absolutely exploded."

Rio's agreement marks an unprecedented divergence in the annual price rises for Australian and Brazilian ore. Traditionally, Vale of Brazil would negotiate a price and Rio and BHP Billiton would agree later to a similar increase. However, Vale's agreement earlier this year for a price increase of between 65 per cent and 71 per cent was disregarded by its Australian rivals, which in turn demanded a higher increase, arguing their proximity to China reduced ore shipping costs.

Chris LaFemina of Lehman Brothers said: "The annual iron ore benchmark contract pricing system may now be broken forever."

Rio's Mr Walsh said although the annual contract system would continue for the foreseeable future, it was clear the system was changing to reflect Australia's proximity to China.

BHP declined to comment on whether it would take Rio's price as a benchmark, but indicated it would decide shortly.

Mr Kloppers said the higher price achieved by Rio compared with Vale was equal to only 10 per cent of the extra shipping costs at today's rates from Brazil to China, compared with Australia to China.

Inflationary concerns were exacerbated as Saudi Arabia's pledge to increase its supply to the highest level in almost 30 years failed to stop rising prices.

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