Major Miners will Cash in on CVRD's Iron Ore Price Increase

Includes: BHP, CLF, RIO, VALE
by: TraderMark

On one hand the news of CVRD securing a 65% increase in iron ore pricing is not surprising, on the other when you truly think about the implicit price inflation, it is astounding. This has been a long awaited negotiation and it was just a matter of how high the increase would be... 65% year over year for iron. Amazing, and as we see in the stock price action of Cleveland Cliffs (NYSE:CLF) of late ... much anticipated.

All the 3 major minors are up significantly on the CVRD (NYSE:RIO) news; BHP Billiton (NYSE:BHP) & Rio Tinto (RTP) up in sympathy. Once precedent is set in the iron ore market, the others follow suit. Remember, as we wrote about in the fall, when shipping rates were higher than they are now... there were times late last year when it cost more to actually ship the iron ore from Brazil than the actual ore itself... which is astounding considering how expensive iron ore was getting.

World of Shortages anyone?

  • Japanese and South Korean steel mills from Brazilian miner Vale, the industry's first term deal this year, but agreed to a 65 percent jump in iron ore prices. Australian miners may hold out for more.
  • Shares including Japan's Nippon Steel and China's Baosteel rallied on relief that the increase wasn't greater. The term price of iron ore, the main raw material used to make steel, has risen fivefold since 2001.
  • Term ore prices had been widely expected to rise by at least 50 percent after spot prices soared to record highs in 2007 and Chinese demand showed no signs of abating.
  • BHP Billiton (BHP) and Rio Tinto (RTP) would likely hold out for higher prices that would better reflect the lower cost of shipping iron ore from Australia and sizzling spot prices, industry sources and analysts said.
  • The 65-percent hike with Vale only related to iron ore and did not include shipping costs. BHP and Rio might seek to set a price including freight, analysts said.
  • The rise could squeeze margins for the steel industry, which is already facing high costs for coking coal and shipping, plus increased competition from Chinese plants.
Disclosure: No positions