Vale,Japan mills agree to 65 pct iron ore price hike

By Yuko Inoue

TOKYO (Reuters) - Japanese and South Korean steel mills have agreed to pay Brazilian mining giant Vale 65 percent more for iron ore under term contracts this year, setting the stage for other Asian steel mills to conclude similar deals.

But industry sources said it was an open question whether Australian miners BHP Billiton and Rio Tinto would soon follow with a similar agreement.

Term iron ore prices had been widely expected to rise by 50 percent or more, after spot prices soared to record highs in 2007 and Chinese steel mills' demand showed no signs of abating. The rise could squeeze margins for the steel industry, which is already facing rising costs for coke, coal, and shipping.

Nippon Steel said on Monday it and POSCO had agreed to pay $78.90 a tonne for Itabira fine ore, a rise of 65 percent, in the year starting April 1.

Japan's JFE Steel Corp, a unit of JFE Holdings Inc, the world's third-biggest steel maker, said it would pay 118.98 cents per FE unit for Southern System fine, FOB, and Tubarao ores.

"It is not yet certain if others will follow," said a shipping executive based in Tokyo.

"There's a strong feeling the Australians -- BHP and Rio -- are unlikely to go along easily. They're busy with the takeover battle. They have been also asking for freight premiums."

Miners have chafed as spot prices for inferior grades of iron ore far exceeded the Australian and Brazilian ore sold under term contracts. Rio Tinto, which is fighting off a takeover proposal by BHP, has said it would like to move to an index pricing system that would better reflect spot prices.