BHP, Rio big winners from China demand

SOARING Chinese demand for iron ore is expected to push the price 30 per cent higher with resource giants BHP Billiton and Rio Tinto the big winners. And mining hopeful Fortescue Metals came close to being a $50 stock when its shares leapt 2.4 per cent yesterday to close at $49.68. Fortescue has yet to ship any iron ore, but from May it plans to start shipping ore to steelmakers in China with an initial targeted output of 45 million tonnes. Fortescue founder Andrew Forrest plans to increase output to 110 million tonnes. The expectation of a sixth-consecutive year of iron ore price increases to more than $US65 a tonne propelled the mining heavyweights share prices higher, dragging the benchmark S&P/ASX 200 Index to another record high. It climbed 56.7 points to 6538. Next month, the mining companies and Chinese steel makers are expected to begin contract talks on the new fixed price for iron ore. Analysts forecast the iron ore prices agreed between the two parties could be as high as $US66.40 a tonne. The price for 2007 was $US51.47 a tonne. Citigroup research said the price escalation would provide record profits for mining groups with Brazilian giant Companhia Vale de Rio Doce expected to double earnings from iron ore by 2009. Rising demand for cars, buildings and railroads is expected to boost China's iron ore import demand by up to 15 per cent next year. Last year, China acquired more than 50 per cent of the world's traded iron ore. The leading trio of BHP, Rio and CVRD supply about 75 per cent of global iron ore exports. Goldman Sachs JBWere commodities analyst Paul Gray said iron ore prices would continue to rise until 2010 as demand outstripped supply. In anticipation of higher prices and strengthened iron ore demand, BHP is planning to expand its rail links with its mines in the Pilbara region of Western Australia. BHP has flagged plans to increase its annual iron ore output in WA threefold to 300 million tonnes by 2015 to satisfy demand from China. BHP is believed to be exploring the duplication of its 426km railway line from Port Hedland to Newman as part of the expansion, so that trains could run on a continuous loop. The miner's iron ore division has been described as the "jewel in the crown" contributing more than $3 billion in earnings. BHP and Rio are the two largest exporters of iron ore in the Pilbara and have been progressively ramping up and expanding their operations to meet the surging demand from China. Earlier this year, Rio approved an almost $1 billion port expansion at Cape Lambert in WA to increase the export capacity from 55 to 80 million tonnes. Yesterday, BHP shares closed 36¢ higher at $43.52, while Rio gained $1.45 to $107.45. Fortescue, which is yet to make a profit, is now bigger by market value than Foster's and Qantas.