Baosteel agrees 65% iron ore price hike

China's largest steel maker, Baosteel, agreed on Friday to pay 65 percent more for iron ore to Brazil's Cia Vale do Rio Doce, for 12 months beginning April 1, 2008.

The price is in line with the benchmark price agreed by Japanese and South Korean steel manufacturers at the beginning of this week.

Baosteel has agreed to pay 118.98 cents per iron ore unit for Southern System fines (SSF), up 65 percent from last year. It also agreed to pay 125.17 cents per iron ore unit for higher-grade ore from Vale's Carajas mine in Brazil, up 71 percent from last year, according to the statement on Baosteel's website.

Analysts said Baosteel's acceptance of the 65 percent price rise was within their expectations, following the lead of Japanese and South Korean steel manufacturers on Monday.

Even so, they said, iron ore talks have not been concluded because the price of two other iron ore categories, pellet ore and lump ore, have not been decided.

"Baosteel still needs to negotiate the prices of these two ore categories with Vale because Australia's Rio Tinto and BHP Billiton do not produce these two categories. The price of pellet ore is expected to equal that of lump ore," said Hu Kai, an analyst at Umetal.com, which tracks metal prices information.

Baosteel is still talking with Rio Tinto about five ore categories and with BHP about two ore categories.

"The ore talks are at a stalemate, as Rio Tinto and BHP are asking for high-sea transportation subsidies, while Baosteel is not in agreement," said Gao Bo, an analyst at Mysteel website.

Baosteel is expected to raise its steel product prices for the second quarter at the end of this month to cover the rising costs of the raw material. Soaring coal and shipping costs have combined to push up the raw material cost and squeeze steel makers' profit margins.

Market insiders believe Baosteel will raise the price by 10 percent, or around 400 yuan per ton.

Analysts said a steel price hike would add costs for other industries, such as auto, refrigerator and washing machine manufacturers, which are heavily reliant on steel as a raw material. Rising costs will eventually be passed on to consumers.