Vale Lifts Iron Ore Price by 65%

Yesterday, major global iron ore producer Brazilian Vale lifted the price for its iron ore by 65% for leading Asian steel producers Nippon Steel Corp, JFE Holdings Inc and POSCO. Eugene Cherviachenko: The hike will strengthen the positions of Vale, Rio Tinto and BHP Billiton in contract negotiations with their major clients, Chinese producers, which we expect to be concluded in one to two months. Of the Ukrainian producers of iron ore, we estimate this will enable the largest Ukrainian exporter, Ferrexpo (FXPO LN: N/R), to increase selling prices the most, from USD 73-75/mt in 2007 to USD 110-120/mt in 2008. The move will trickle down to producers oriented on the domestic market, but we expect selling prices to rise less than global prices. In late 2007, Ukraine’s largest supplier of iron ore products, Metinvest agreed on long-term contracts with local non-integrated steel smelters, consumers of more than 80% of its excess products, according to which the price of sinter feed was USD 70/mt or almost 25% higher than the average local spot price in 2007; the parties agreed to renegotiate the price on April 1. We estimate the Ukrainian price could increase to USD 90/mt in 2008 (+50% yoy). We believe the fundamental boost provided by higher prices is already factored in following market’s strong acquisition-and-placement news driven run to close 2007. Iron ore plays now look fairly priced, particularly taking into account the persistence of nontransparent schemes by some Ukrainian-listed companies.