Bloomberg News

Iron Ore Prices May Not Decline 15% Next Year, JPMorgan Says

March 06, 2007

Iron ore prices may defy analysts' expectations for a fall of as much as 15 percent in 2008 amid surging demand from China and higher Japanese steel mill profits, said JPMorgan Chase & Co., the third-biggest U.S. bank.

A rise of five percent in contract prices for the year starting April 1, 2008, would boost Rio Tinto (RIO) Group's profit by $1 billion and BHP (BHP) Billiton Ltd.'s by $650 million, said JPMorgan analysts led by David George in a note yesterday. The firm is maintaining its forecast for a 10 percent cut.

Record Chinese iron ore imports in January, a new export tax in India and record Japanese steelmaker profits suggested expectations of a 10-15 percent decline may prove to be too ``pessimistic,'' the analysts said. BHP, Rio and Cia. Vale do Rio Doce account for three-quarters of global iron ore trade.

``If the positive iron ore market holds through 2007, the earnings forecast for Rio and BHP could be subject to upgrade,'' the analysts said.

Prices for iron ore will rise 9.5 percent from April, 2007, to a record, the fifth straight year of gains, on soaring demand from Chinese steelmakers.

Japanese steel companies are expected to post a third straight year of record profits, allowing them to pay more for raw materials, the report said. Chinese iron ore imports rose 32 percent in January to 35.9 million tons from a year ago, China's customs office said on Feb. 12.

An Indian tax of 300 rupees ($7) a ton levied on iron ore exports from March 1 won't stop Chinese steelmakers from continuing to buy ore from the country, due to ``strong demand,'' JPMorgan said.

``The Chinese will continue to buy and accept higher spot prices from the passed-on tax,'' they said. ``This can only support stronger April 1 2008 contract prices for imported ore from Australia and Brazil.''

Rio and BHP's iron ore mines are in Australia, and Vale (VALE5), the largest exporter of the raw materials, has its mine in Brazil.

To contact the reporter on this story: Tan Hwee Ann in Melbourne at hatan@bloomberg.net;

To contact the editor responsible for this story: James Poole at jpoole4@Bloomberg.net.


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