Rio Tinto has been a good firm to investors recently. The shares have been as hot as the Chinese demand for iron ore driving them; and it is Chinese demand that has allowed Rio to negotiate a 71.5% (no, not a misprint) iron ore price increase for the shipping year beginning 1 April with Japan's Nippon Steel. Nippon, lacking bargaining power in the face of Chinese demand, acted to secure supply ahead of what it feared would be even higher prices.

Brokers are accordingly excited and have marked-up earnings forecasts for big iron ore miners. Citigroup Smith Barney, for example, raised its 2005 profit estimate for Rio by 10% to US$4.3 billion; and by 13% to US$4.5 billion in 2006.


Given that the first price settlement of each year sets the mark for all other iron ore contracts in the global market, it's not a surprise that the world's three largest iron ore producers - Rio Tinto, BHP Billiton and Brazil's Companhia Vale do Rio Doce (CRVD) - are planning huge output increases. The United Nations Conference on Trade and Development estimates 450 million tonnes of additional iron ore capacity will come on stream by 2009.

Down in the steel-making trenches meanwhile, China has spent the greater part of a year trying to talk down domestic steel production. Their National Development and Reform Commission (NDRC), the main government department overseeing economic development, estimates that by end-2005 China's annual steel output will reach 330 million tons, or what the NDRC believes will be the market demand of 2010. Talk having failed, the NDRC has begun clamping down on the industry.

Maybe China will be able to control its "official" steel supply (a prop to prices); maybe their low grade "illegal" producers won't have a significant impact on overcapacity; maybe the heavy steel-consuming Shanghai construction sector won't slow either (although many commentators believe it is but a pop away); and maybe the iron ore producers will be able to control the price-impact of the additional capacity they plan.

Indeed, looking at the big iron ore miners' share prices, all one sees is this optimism. Sound advice this writer once received (albeit in a different context) was "protect the downside". It may be too early to jump from the China commodities bandwagon this cycle; but it is hard to see things getting much better than they are right now for miners' share prices.

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