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Vale, JFE Agree to 65% Iron Ore Price Increase

Japanese and South Korean steel mills have agreed to pay Brazilian mining giant Vale 65 percent more for iron ore under term contracts this year, sources said on Monday, setting the stage for other Asian steel mills to conclude similar deals.

Nippon Steel said it and POSCO had agreed to pay $78.90 a ton for iron ore, a rise of 65 percent, in the year starting April 1. A source from Japan's JFE Steel also said that company had agreed a similar deal.

But industry sources said it was an open question whether Australian miners BHP Billiton and Rio Tinto would soon follow with a similar agreement.

Term iron ore prices had been widely expected to rise by 50 percent or more, after spot prices soared to record highs in 2007 and Chinese steel mills' demand showed no signs of abating. The rise could squeeze margins for the steel industry, which is already facing rising costs for coke, coal, and shipping.

JFE Steel is a core unit of JFE Holdings, the world's third-biggest steel maker.

"It is not yet certain if others will follow," said a shipping executive based in Tokyo. "There's a strong feeling the Australians -- BHP and Rio -- are unlikely to go along easily. They're busy with the takeover battle. They have been also asking for freight premiums."

Miners have chafed as spot prices for inferior grades of iron ore far exceeded the Australian and Brazilian ore sold under term contracts. Rio Tinto, which is fighting off a takeover proposal by BHP, has said it would like to move to an index pricing system that would better reflect spot prices.

China Iron and Steel Association deputy director general Chen Xianwen said he could not confirm specifics of a deal pending a formal announcement, which he expected this week.

Chen told Reuters that Chinese mills would follow the traditional system of accepting whatever deal is first agreed between any steel mill and one of the three miners.

"If Nippon Steel and Baosteel agree to the 65 percent price rise, then we'll have no choice but to accept the deal because being such a small player, we don't have much bargaining power," a purchasing official from Taiwan's China Steel told Reuters.

"We will not comment on ongoing iron ore price negotiations," Rio Tinto spokesperson Gervase Greene in Perth said.