Iron Ore Prices to Rise, Defying Spot Market Fall, Goldman Says

By Jesse Riseborough

Sept. 17 (Bloomberg) -- Contract prices for iron ore may extend gains into a seventh year, defying declines in cash prices for the steel-making material and rising stockpiles at ports in China, Goldman Sachs JBWere Pty said.

Goldman maintains its forecast for an 18 percent increase in contract prices for the year starting April 1, 2009, analysts led by Melbourne-based Malcolm Southwood said in a report yesterday. Risks to its forecast include a 30 percent decline in Chinese spot prices from their high this year and a 50 percent to 60 percent gain in Chinese port stocks, it said.

Surging demand from China, the world's biggest consumer of the ore, has boosted prices this decade, helping deliver record profits for BHP Billiton Ltd., Rio Tinto Group and Brazil's Cia. Vale do Rio Doce. Rio and BHP won a price increase of as much as 97 percent this year.

``Our view is that supply-demand dynamics for high quality seaborne iron ore are sufficiently robust in their own right for the large contract suppliers to secure a seventh consecutive annual price rise,'' Goldman said. ``We also believe Australian suppliers are well positioned over the medium term to gain a bigger share of the fast-growing Chinese import market.''

Rio Tinto, the world's second-largest iron ore producer, last week said it wouldn't agree to any more traditional contracts for the ore based on benchmarks. The company will use a ``hybrid structure'' to allow it to benefit more from higher market prices, spokesman Nick Cobban said Sept. 12.

BHP, the world's largest mining company, wants ``greater transparency'' in iron-ore pricing and won't use current benchmarks when replacing outstanding contracts, Chief Executive Officer Marius Kloppers said in June.

To contact the reporter on this story: Jesse Riseborough in Melbourne at jriseborough@bloomberg.net