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Global iron ore price set to soar

Nippon Steel Corporation

(CNN) -- Iron ore miners across the globe are rubbing their hands, after Brazilian mining company CVRD secured a record price rise of 71.5 percent for the iron ore it sells to Japanese steel companies.

Iron ore producers in Australia, such as Rio Tinto and BHP Billiton, are hoping the price hike swallowed by Nippon Steel will set a precedent for them.

Shares of CVRD, the world's largest exporter of iron ore, surged about 6 percent in late trading in Brazil, the Reuters news agency reported.

And analysts have upgraded their earnings forecasts for Rio Tinto and BHP Billiton in the wake of the deal.

As the good news rippled through the global iron ore industry, steel-makers are bracing for higher costs, with the attendant possibility of inflation pressures.

The Japanese steel industry's overall materials procurement costs are now expected to leap by more than 1 trillion yen ($9.5 billion) on the year, according to the Nihon Keizai Shimbun business daily.

Japan imports all 130 million tons of the iron ore its steel industry uses each year, with 61 percent of the total coming from Australia and 18 percent from Brazil, according to the newspaper.

Higher input costs inevitably will mean higher costs for steel products. The price of hot rolled coil steel in Asia has risen almost 60 percent in the past year.

Australian steel producer BlueScope warned on Monday that higher raw material costs could add to global inflation.

Shares in Nippon Steel were down in early trading on the Tokyo Stock Exchange Wednesday.

The steel producers' woes began late last year, when they agreed to pay 120 per cent more for coking coal, giving resource suppliers the upper hand in negotiations.

The soaring prices are driven by Japan's neighbor China, where rapid industrialization is creating an insatiable hunger for commodities.

Analysts say Nippon Steel's decision to accept the price jump was driven by fears it could be caught short of supplies as Beijing buys up big.

"It is an exceptional increase," UBS resources analyst in Sydney, Glyn Lawcock, told The Australian newspaper.

"The prices being achieved across a whole raft of commodities are setting new paradigms at this stage," he was quoted as saying.

Other analysts also cite supply constraints as fueling the price rise.

"Those supply contraints are likely to inhibit Australian bulk export volumes for the next year or so," said David Thurtell, a commodity strategist from the Commonwealth Bank of Australia.

"If this Brazilian settlement translates through to Australian producers -- and we don't see any reason why it won't -- iron ore settlements by domestic producers will rise from $46.65 to $80/tonne," Thurtell said in a commentary released Wednesday morning.

The Nippon Steel-CVRD deal is also sending shock waves through Europe.

"We are in uncharted territory given that the steel industry hasn't seen an increase of this magnitude probably in 50 years and production increases of this magnitude either," said Peter Fish, director of UK steel industry consulting group MEPS, according to Reuters.

"But under normal circumstances, the hike in Europe would be about the same, with variations of several percentage points," he was quoted as saying.

Reuters contributed to this report.

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