Iron ore price deal sparks steel fury

European steel and motor industries yesterday accused mining companies of unfair pricing practices following the introduction of a new system for valuing iron ore that will see the cost of the resource nearly double.

Eurofer, which represents European steelmakers, has complained to the European Commission about possible pricing abuses, saying there were "strong indications of illicit co-ordination of price increases and pricing models and pressure on individual steel producers to accept these changes".

The appeal to Brussels comes at a sensitive time, since competition officials at both the European Commission and the Bundeskartellamt, Germany's antitrust regulator, are already scrutinising a proposal by Rio Tinto and BHP Billiton to combine their rich iron ore fields in western Australia.

The complaints followed warnings that steel prices would have to rise by up to a third after miners and steelmakers in Japan and China agreed to a change in pricing iron ore. The higher steel costs will flow on to increased prices for cars, construction girders and white goods, steelmakers said.

Brazil's Vale and Anglo-Australian BHP Billiton have led the push to scrap a 40-year-old benchmark system of annual contract negotiations in favour of quarterly contracts linked to the global spot price for ore.

With old benchmark levels lagging behind spot prices by as much as 100 per cent in a tight market for the resource, iron ore costs will double in the short term.

"A 100 per cent increase in iron ore [prices] is an insult," said Gordon Moffat, director general of Eurofer. Acea, which represents car and truckmakers in Europe, claimed that the three biggest producers, Vale, Rio and BHP-Billiton, had "the pricing power of an oligopoly".

Rio and BHP have said their joint venture will be "production-only", combining infrastructure and budgets but not pricing power.

Building companies said construction work would become expensive, and commercial construction would be hit hard.

"If contractors have to pass this cost on to the customers, it could stifle the current recovery we are seeing in the building industry," said Noble Francis, economics director at the Construction Products Association.

Brussels said yesterday that it would "make use of all relevant information in its possession" to examine potential competition issues in the sector.

Unlike in Europe, Chinese and Japanese steelmakers are selling into a booming market and are confident about the long-term benefits of a more flexible pricing system.

Reporting by John Reed, Javier Blas, Ed Hammond, William MacNamara and Nikki Tait