Rio Confident It Can Extract Higher Price

Sydney Morning Herald

Thursday March 13, 2008

Jamie Freed

RIO TINTO'S iron ore chief executive, Sam Walsh, has expressed confidence his company's hard line in this year's benchmark pricing negotiations will pay off.

Last month Brazil's Vale achieved a 65 per cent price rise for some products and a 71 per cent rise for its premium Carajas ore, but Rio Tinto and BHP Billiton have so far refused to settle with customers.

Both have argued they deserve a so-called "freight premium" since it costs less to ship iron ore from Australia to Asia than from Brazil to Asia.

Following a speech at the AJM Global Iron & Steel Conference in Perth yesterday, Mr Walsh told reporters that a settlement did not appear imminent but the price could be higher than the Vale benchmark.

"The indication would be greater than 71 per cent," Mr Walsh said, according to Bloomberg.

"The iron ore settlement between Vale and Nippon Steel was a complex settlement. For the first time in history a two-tier process was adopted."

Most analysts expect Rio and BHP to achieve at least a 71 per cent rise in the benchmark price, but some doubt whether they will get a freight premium too.

Both companies are working hard to expand production at a time of record prices. Mr Walsh noted Rio had spent more than $US7.5 billion ($8 billion) on iron ore expansions since 2003, which exceeded the company's net profit from iron ore over that period.

Yesterday Rio approved a $US475 million expansion to lift output at the Iron Ore Company of Canada to 22 million tonnes a year, from 18 million tonnes.

It is the first phase of a three-year plan to boost IOC annual production by half.

"The iron ore market is as tight as it ever has been and our sustained and substantial reinvestment in our operations in Canada and worldwide demonstrates the confidence we have in that market," Mr Walsh said.

Some analysts expect the iron ore price will rise another 30 per cent next year.

But as Goldman Sachs JBWere noted yesterday, there is a risk a shortage of coking coal could start to affect demand for iron ore and other commodities.

"There is a strong likelihood, in our view, that some steel capacity could be shut in during 2008 through sheer non-availability of coking coal," analyst Malcolm Southwood said.

"This is not helpful at all to the broader commodities story, because it would imply the deferment of marginal growth projects with, at the margin, negative implications for economic growth."A PICTURE on page 29 of yesterday's Herald was incorrectly captioned as being of the iron ore chief executive of Rio Tinto, Sam Walsh.

© 2008 Sydney Morning Herald

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