Do you think higher oil prices will only get you at the gasoline pump? Think again. Energy's escalation is partially responsible for a newly minted hike in iron ore prices that will likely send steel prices meaningfully higher as well.
On Monday, after negotiations with Baosteel Group, China's biggest steelmaker, Anglo-Australian mining company Rio Tinto (NYSE:RTP) and its Melbourne-based suitor BHP Billiton (NYSE:BHP) announced a whopping 85% increase in the benchmark price of iron ore. As you probably know, iron ore is a key component in the manufacture of steel, accounting for well over half of the related raw-material costs.
The newly negotiated price will be retroactive to April, meaning that steelmakers will have to ante up the difference between the previous $85 a metric ton amount they've been paying and the new $140 a ton rate. The latter level will apply not just to the Chinese company, but to all other steelmakers around the world that do business with the two big mining companies. It seems that the latest price increase reflects, at least in part, production cost pressure via surging energy prices and rising shipping costs and related freight differentials.
With BHP having a massive takeover bid on the table for Rio Tinto, it apparently was especially important to the target company to maximize its take from the contract negotiations. Twice as much of Rio Tinto's profits are generated from iron ore as is the case with BHP.
What's all this mean for Foolish investors? For my money, it's yet another indication of the rapidly escalating importance -- and muscle -- of the big mining companies. That importance almost certainly will only increase as resources become more dear. For that reason alone, I'm convinced that Rio Tinto, BHP, and Vale (NYSE:RIO) all should be positioned high on the watch lists of my Foolish friends.
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