Japanese and South Korean steel manufacturers have agreed to a 65 percent jump in iron ore prices under term contracts for the 12 months from April.

Although Baosteel, which represents Chinese steelmakers in the negotiation, declined to comment, industry sources said that going by past performance, it is expected to accept the terms, which exceeded previous expectations of a 30-40 percent rise.

As a result, Baosteel and other Chinese iron producers could raise steel product prices for the second quarter as early as this week, they said.

Tokyo-based JFE Holdings Inc, a steelmaker, yesterday announced that it agreed to an increase in the iron ore price to $78.9 per ton with Vale of Brazil, a major ore supplier. Japan's Nippon Steel Corp and South Korea's Posco were also reported to have agreed to the new price.

Benchmark pricing is negotiated between the world's three largest iron ore producers - Vale, Rio Tinto and BHP Billiton - and Asian and European steelmakers.

The latest round of talks, which began in December, have resulted in the sixth consecutive increase in iron ore prices and the second largest jump since 2005, when steelmakers agreed to a 71.5 percent rise demanded by ore producers.

Analysts said the rise will squeeze the profit margins of steel companies, which are also facing rising coal and shipping costs.

"The increase of steel product prices of Chinese steelmakers is expected to be larger than before because the 65 percent increase will add around 400 yuan per ton to production costs," said Wang Zhaohua, an analyst at TX Investment Consulting Co Ltd.

"Chinese steelmakers are expected to increase the steel price to a level that can largely cover the rising cost of raw materials as the domestic and overseas demand remain strong," said Zheng Dong, an analyst at Guosen Securities.

Steel product prices in the international markets showed large increases in the weeklong Spring Festival on expectations of iron ore price rises and strong demand.

"The decrease of China's steel exports further aggravated the supply shortage in the world," said Zheng. According to statistics from China Customs, China's steel exports dropped 5.4 percent to 4.14 million tons in January.

The reconstruction after the large snowfall will also increase domestic demand for steel, said analysts.

Steel stocks rose in yesterday's trading. Baosteel jumped 1.75 percent to close at 17.49 yuan.

(China Daily February 19, 2008)