Nippon Steel Likely to Accept Record Iron Ore Gain

June 24, 2008

June 24th (Bloomberg) – Nippon Steel Corp., the world’s second-biggest steelmaker, and Asian rivals will probably accept a record increase in iron ore prices from Rio Tinto Group, adding to pressure on profit margins.

Baosteel Group Corp., China’s biggest steelmaker, yesterday agreed to pay as much as 97 percent more for Australian ore, sending its shares down 10 percent today. Japanese mills will probably pay the same price, said UBS AG’s Atsushi Yamaguchi.

Nippon Steel in April forecast a 41 percent profit decline after accepting a smaller iron ore price increase from Brazil’s Cia. Vale do Rio Doce, the biggest exporter of the raw material. Steelmakers have raised prices to pass on higher costs to carmakers and builders.

“The increased costs are putting more pressure on us,” Wan Yi, board secretary of China’s third-largest mill Wuhan Iron & Steel Co., said by phone. “We cannot all depend on our customers to pass on the costs. We’re trying hard to control the costs in manufacturing.”

Nippon Steel is still negotiating with Rio and BHP Billiton Ltd. on iron ore prices, said Hiroshi Nakashima, a spokesman for the steelmaker. JFE Holdings Inc., Japan’s second-biggest steelmaker, and Sumitomo Metal Industries Ltd., the third- largest, didn’t immediately return calls seeking comment.

Baoshan Iron & Steel Co., the Shanghai-listed arm of Baosteel, fell by the 10 percent limit in trading today to 8.85 yuan. It traded at 9.27 yuan at 10:34 a.m. local time.

Costs Concerns

“Baoshan tumbled on concerns of higher raw materials costs including iron ore and coal,” Lu Yizhen, who oversees the equivalent of $1.3 billion as head of research at Citic- Prudential Fund Management Co., said in Shanghai. “Steelmakers are unlikely to pass on the higher costs to customers. Steel prices may have peaked.”

Vale said in February it won annual gains of 65 percent and 71 percent. Rio Tinto and BHP Billiton, which account for half of Asian iron ore sales, pushed for a higher price for their Australian ore because it costs less for Asian steelmakers to ship.

“The increases show Asian steelmakers are now in a weaker position relative to miners,” UBS analyst Yamaguchi said today by phone in Tokyo.

BHP Increases

BHP, the world’s third-largest exporter of iron ore, will probably get a similar price increase to Rio Tinto, Tim Gerrard, an analyst at Austock Securities Ltd., said in a note today.

BHP’s Melbourne-based spokeswoman Samantha Evans declined to comment.

Baosteel will pay 80 percent more for Pilbara blend fines in the year that began April 1, London-based Rio Tinto said yesterday in a statement. Pilbara blend lump will rise by 97 percent.

The price rose by 85 percent on a weighted average, said Gervase Greene, a spokesman for Rio Tinto, the world’s second largest exporter of iron ore. About 75 percent of Rio’s production is fines and the balance is lump.

Fines are cheaper because they require more processing by steel mills than lump products.

Rio Tinto will receive $130 a ton for lump iron ore and $90 a ton for fines, Austock’s Gerrard said. He lifted his full year profit estimate for Rio by 4.3 percent to $14.4 billion.

“We’re still evaluating the increased costs with regards to our steel prices,” Chen Ying, chief financial officer of Baoshan Iron & Steel, said today by phone. “The additional costs are limited.”

The company will set steel prices for the fourth quarter in August, she said.

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