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Will Steel Lead the Inflation Parade?

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Let's take a look at the annual go-round among the big companies that supply iron ore and the steelmakers that need it. 

The world's three largest iron ore miners are crucial here: Vale (NYSE: VALE  ) , BHP Billiton (NYSE: BHP  ) , and Rio Tinto (NYSE: RTP  ) . As was generally the case in 2009, the mining threesome, which controls about two-thirds of the world's $200 billion iron ore trade, is attempting to reach a meaningful conclusion on ore prices with the Chinese steelmakers who represent their largest customer base.

Vale has already reached quarterly contract agreements with all but about 3% of its worldwide clients. The quarterly approach represents a huge departure from the longtime system of annual ore pricing. Under the new approach, Vale has been able to walk away with price increases to about $100-$110 per ton from its Japanese customers, versus last year's level near $60. BHP has reportedly done even better.

That level of increase makes it difficult for Chinese steelmakers to cut a sweet price agreement. The chairman of China's largest private steelmaker has noted that, with no other options, Chinese manufacturers seem essentially required to follow the terms cut by the Japanese mills.

China's relationship with the ore suppliers will be well worth watching, especially after certain events of last year. Amid a virtual price imbroglio, Rio Tinto in 2009 turned down a $19.5 billion bid from Aluminum Corp. of China (NYSE: ACH  ) to double its stake in Rio.

Shortly thereafter, four of Rio's Shanghai-based employees were detained and eventually charged with bribery and stealing state secrets. Until the recent trial, where all four pleaded guilty to the bribery charges, it was widely assumed that the arrests stemmed from political pique in China.

The price increase will affect more than the Asian companies. Indeed, Gordon Moffat, director general of Eurofer, which represents European steelmakers, has labeled as "absurd" Vale's contention that his group has indulged in collusion through price talks. Higher international price increases should benefit domestic producers like U.S. Steel (NYSE: X  ) , which owns its own ore mines, and minimill operators like Nucor (NYSE: NUE  ) that rely on scrap.

The effects of higher ore prices will be felt globally soon enough. For instance, Luxembourg-based ArcelorMittal (NYSE: MT  ) , the world's biggest steelmaker, has warned of a 20% increase in the prices it charges customers. I can't say to what extent this will fuel inflation, but it should lead to increased prices on autos and appliances, among other things.

All in all, it's difficult for me to find fault with the three big iron ore producers. To my mind, all represent attractive opportunities for Fools with a penchant for investing in minerals and resources.

Related Foolishness:

Fool contributor David Lee Smith greatly prefers boating oars to iron ore. He doesn't own shares in any of the companies named above. The Motley Fool's disclosure policy sails beautifully.

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