Nippon Steel Corp, the world's second-biggest steel maker, and Asian rivals will probably accept a record increase in iron ore prices from Rio Tinto Group, adding to pressure on profit margins.

Baosteel Group Corp, China's biggest steel maker, has agreed to pay as much as 97 percent more for Australian ore. Japanese mills will probably pay the same price, said UBS AG's Atsushi Yamaguchi.

Nippon Steel in April forecast a 41-percent profit decline after accepting a smaller iron ore price increase from Brazil's Cia Vale do Rio Doce, the biggest exporter of the raw material. Steel makers have raised prices to pass on higher costs to car makers and builders.

"The increased costs are putting more pressure on us," said Wan Yi, board secretary of China's third-largest mill Wuhan Iron & Steel Co. "We cannot all depend on our customers to pass on the costs. We're trying hard to control the costs in manufacturing."

Nippon Steel is still negotiating with Rio and BHP Billiton Ltd on iron ore prices, said Hiroshi Nakashima, a spokesman for the steel maker. JFE Holdings Inc, Japan's second-biggest steel maker, and Sumitomo Metal Industries Ltd, the third-largest, didn't immediately return calls from Bloomberg News.

Baoshan Iron & Steel Co, the Shanghai-listed arm of Baosteel, fell by the 10 percent limit in trading before closing 7.83 percent down at 9.06 yuan (US$1.31) yesterday.

"Baoshan tumbled on concerns of higher raw materials costs including iron ore and coal," Lu Yizhen, who oversees the equivalent of US$1.3 billion as head of research at Citic-Prudential Fund Management Co, said in Shanghai. "Steel makers are unlikely to pass on the higher costs to customers. Steel prices may have peaked."

"We're still evaluating the increased costs with regards to our steel prices," Chen Ying, chief financial officer of Baoshan Iron & Steel, said yesterday. "The additional costs are limited."

Vale said in February it won annual gains of 65 percent and 71 percent. Rio Tinto and BHP Billiton, which account for half of Asian iron ore sales, pushed for a higher price for their Australian ore because it costs less for Asian steel makers to ship.

"The increases show Asian steel makers are now in a weaker position relative to miners," UBS analyst Yamaguchi said yesterday.

Baosteel will pay 79.88 percent more for Pilbara blend fines in the year that began April 1, London-based Rio Tinto said in a statement. Pilbara blend lump will rise by 96.5 percent.

(Shanghai Daily June 25, 2008)