DUBAI (Bloomberg) – Asia’s three largest steelmakers agreed to pay Cia. Vale do Rio Doce 65 percent more for iron ore, setting a global benchmark for prices that’s less than some analysts estimated.

Nippon Steel Corp., JFE Holdings Inc. and Posco will pay the increase for the year starting April 1, the companies said separately on Monday. The three mills and China’s Baosteel Group Corp. make up four of the top five global producers of the alloy.
JFE and Wuhan Iron & Steel Co. paced gains by steelmakers in Asian trading on optimism they will increase prices they charge automakers and shipbuilders after the accord with Vale, the world’s biggest exporter of iron ore. Japan’s Topix Iron & Steel Index fell 17 percent this year before today on concern the increase would be as much as 80 percent.
“Some had anticipated the price for iron ore would double,'” said Mitsushige Akino, who oversees about $560 million in assets as chief investment officer at Ichiyoshi Investment Management Co. “Demand in emerging markets will likely help steelmakers increase sales and fend off the cost increase.”
Nippon Steel, Asia’s biggest mill, climbed 3.2 percent to 575 yen, while JFE, the second-largest, rose 6.3 percent to 4,410 yen, the most since Jan. 25. The Topix index rose 3.5 percent. Baoshan Iron & Steel Co., the publicly traded unit of China’s biggest steelmaker, rose as much as 3.8 percent and Wuhan Iron & Steel Co. rose as much as 6.5 percent in Shanghai.
----------------------------------------80% increase
Iron ore sold under long-term supply contracts may climb as much as 80 percent in the year starting April 1, according to a survey of four analysts Bloomberg News published Feb. 8. The biggest gain previously was 71.5 percent in the year starting April 1, 2005.
Monday's settlement means contract iron ore prices will rise for a sixth year to a record as China increases output of steel, boosting earnings at the three biggest exporters, Brazil’s Vale, Rio Tinto Group and BHP Billiton Ltd. Vale sought a 70 percent gain in talks with Chinese steelmakers, the Australian reported Jan. 15, citing market speculation.
JFE also agreed to a 71 percent increase for higher-grade ore from Vale’s Carajas mine in Brazil. JFE will pay 125.17 cents per iron unit for the ore, JFE said on Monday in the statement. This compares with 73.2 cents last year. It will pay 118.98 cents for so-called Southern System fines, from 72.11 cents.
---------------------------------------BHP, Rio Tinto
“Despite Australian iron ore being a slightly lower grade than Carajas fines, I wouldn’t be surprised if BHP and Rio are going to be pushing for the same as the Carajas deal,” Mark Pervan, a senior commodity strategist at Australia and New Zealand Banking Group Ltd., said on Monday from Melbourne. “The expectation is that it is likely they at least get the 71 percent.”
Rio Tinto is still in talks with mills and hasn’t reached an agreement on price, Gervase Greene, a spokesman for the London based company said by phone from Perth, Australia. Rio and BHP are the world’s second- and third-largest exporters of the ore.
Smaller Australian iron ore companies gained. Mt. Gibson Iron Ltd. rose 4.9 percent and Fortescue Metals Group Ltd. surged 5.2 percent at the 4:10 p.m. Sydney time close on the Australian Stock Exchange. Melbourne-based BHP fell 33 cents, or 0.8 percent, to A$38.96 at Rio declined 2.2 percent to A$134.
Soaring demand for cars and ships in China is stoking Asian appetite for steel, allowing Nippon Steel, Posco and rivals to raise product prices. China, the world's fourth-largest economy, expanded 11.4 percent last year, the fastest pace in 13 years.
-----------------------------------------Pass on gains
“They should be able to pass through a large portion of the costs,” Frederic Gits, senior director at Fitch Ratings in Tokyo, said Monday by telephone. “Their end customers in shipping and automakers are still doing pretty well.”
Contract prices for Rio Tinto’s products, which don't include shipping and insurance costs, were set at $51.47 a metric ton for the year starting April 1, 2007. Including freight, contracted iron ore was sold in December for $85 a ton, Rio Tinto said in a Dec. 18 statement.
Iron ore producers and steel mills hold annual talks starting before the end of the year in Asia to set contract prices. Cash prices in China have surged to four times the current contract rate because of rising shipping costs and demand. Prices at Beilun were unchanged at 1,420 yuan ($198) a metric ton last week.
Lehman Brothers Holdings Inc. said in December that contract prices could rise 50 percent this year. Goldman Sachs JBWere Pty. in November said they could increase by more than 50 percent. Any gains above 40 percent will lead to earnings revisions for mining companies, Credit Suisse said Jan. 16.
---------------------------------------Market expectations
“The result is higher than the market expectation of 50 percent,” said Helen Wang, Shanghai-based analyst with DBS Vickers Hong Kong Ltd., “Although steel prices are rising now, steelmakers will feel pressure from the higher raw-material costs late this year as prices may fall back.”
Nippon agreed a 9.5 percent gain in ore prices for the 12 months from April 1, 2007, after Baosteel Group Corp., Baoshan’s parent, settled with Vale. That was the first time China had set a benchmark price increase for steelmakers worldwide.
Calls and an e-mail sent to Fernando Thompson, a Rio de Janeiro-based spokesman for Vale, weren’t immediately returned. Samantha Evans, spokeswoman for Melbourne-based BHP, declined to comment today by phone.
---------------------------------------------This quarter
ArcelorMittal, the world’s largest steelmaker, said this month it may have to raise some prices further this quarter depending on the outcome of the annual talks. Steel companies in Asia have also been raising prices because of higher costs.
“Steelmakers will probably get 100 percent or even 150 percent of the costs back through price increases,” Michelle Applebaum, who runs a steel equities research firm in Highland Park, Illinois, said.