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Strong dollar a damper on good iron ore news

THE announcement by BHP and Rio Tinto of better-than-expected contract prices for lump iron ores in this year’s negotiations may not be such good news for smaller producers feeling the effect of a strong Australian dollar.

This is despite the prediction that the landmark price rise and bullish sentiment could trigger further iron ore development in the Pilbara.

Both Rio Tinto and BHP Billiton, the world’s second and third largest producers respectively, have announced that they have secured an 18.62 per cent rise (to US45.93 cents per dry metric ton unit) in lump iron ores for shipments to Nippon Steel.

The deliveries for the contract year begin April 1 – coinciding with the start of the Japanese financial year.

This result is significantly higher than the 10-15 per cent predicted by analysts, and the 9 per cent rise secured for 2003.

The rise followed a similar announcement from the world’s largest iron ore producer, Brazil’s Companhia Vale do Rio Doce (CVRD), and the world’s largest steel producer, Europe’s Arcelor, that had also secured an 18.62 per cent rise in iron ore fines.

While negotiations with other Japanese customers continue, a BHP Billiton spokesperson said the price rise would set a benchmark price throughout Asia.

However, while the rising Australian dollar will have a subdued effect on BHP Billiton and Rio Tinto, both of which report in US dollars, smaller producers are expected to feel the pinch.

Trade in iron ore is booming thanks to strong Chinese demand, which last year resulted in the announcement that BHP Billiton and Rio Tinto would fast-track their Pilbara iron ore expansions.

BHP Billiton announced it would fast track the $1 billion expansion of its Pilbara iron ore division to lift its output to 100 million tonnes by the middle of 2004.

Rio Tinto announced it would lift Hamersley Iron’s production to 116mt/year through the expansion of Dampier Port and Yandicoogina mine – a total investment of $1.25 billion.

Further, in conjunction with its joint venture participants in Robe River Iron Associates, Rio Tinto also announced it would spend $142 million expanding its West Angeles iron ore mines to a nominal capacity of 25mt/year.

In a further development, this year Rio Tinto announced it was working towards a cooperation agreement between wholly owned Hamersley Iron and its 53 per cent-owned Robe River business.

While both businesses would remain separate business entities, the cooperation agreement would provide more efficient use of infrastructure such as rail, port, power, and non-infrastructure assets such as mobile and mining equipment and site and corporate services.

A Rio Tinto spokesman said closer cooperation was expected to lead to decreased costs and would provide a competitive advantage.

Iron ore and coking coal are both used in the production of crude steel, and have been in high demand due to China’s expanding appetite for steel and iron.

China’s iron ore imports have almost doubled since 2001 (to 148 million tonnes in 2003) and China is set to overtake Japan as the world’s largest importer of iron ore.

The Australian Bureau of Agriculture and Resource Economics (ABARE) has forecast a rise in Australian iron ore exports by 12 per cent, to 203 million tonnes in 2003-04.

However, ABARE has forecast that the value of these exports will increase by only 4 per cent to about $5.5 billion as the appreciation of the Australian dollar is expected to offset the higher US dollar prices and increased export volumes.

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