Iron ore supply deficit seen in 2008-report

SYDNEY, Jan 21 (Reuters) - A worldwide iron ore supply deficit of between 20 million and 25 million tonnes is likely in 2008, Credit Suisse forecast in a report on Monday, on the back of high demand from steel mills.

Iron ore miners are earmarking billions of dollars to expand mines, build new ore freighters and automate operations to dig faster and deeper to satisfy steel mills hungry for more ore.

Credit Suisse also said it expects annual term iron ore prices to rise by 55 percent versus a consensus forecast of a 35 percent hike.

Iron ore prices are set annually by the big three mining companies, Vale VALE5.SARIO.N, Rio Tinto Ltd./Plc. RIO.AXRIO.L and BHP Billiton Ltd./Plc. BHP.AXBLT.L, after closed negotiations with big steel producers in Europe, Japan and more recently China.

Demand for iron ore has taken off in recent years, led by rising steel production in China, now the world’s top importer.

“Despite the expected slowdowns in the U.S. and credit tightening in China, 2008 will look very similar to 2007,” Credit Suisse said in a report.

It said 2007 was one of the tightest markets ever for iron ore, leaving some steel makers short of the raw material.

“We are estimating another deficit of about 20 million-25 million tonnes against seaborne trade of about 870 million tonnes,” it said.

Spot prices have been quick to reflect tight supplies and are at a 66 percent premium to ore shipped from Brazil on a cost and freight basis, Credit Suisse said.

Iron ore mining is a low-margin, high-cost business, where hundreds of millions of tonnes of material must be dug up and transported by railway to distant ports for shipment.

It is also one of the key reasons why BHP is seeking to merge with Rio Tinto.

BHP Chief Executive Marius Kloppers has argued that a tie-up with Rio would unlock “compelling synergies” in iron ore mining in Australia, where both companies mine neighbouring lodes. Rio, which plans to boost its annual ore output by about 23 percent to 220 million tonnes next year, has so far rebuffed BHP’s advances, preferring to underline the value of remaining independent.

BHP, too has vowed to increase production, as has Vale.

Negotiations were ongoing between mining companies and customers for pricing iron ore in the shipping year running between April 1, 2008 March 31, Credit Suisse said.

The miners angered their customers in 2005 when they insisted on a 71.5 percent price hike, which they argued was needed to help finance mine expansion work to meet growing demand from China. Since then price hikes have been much smaller. ($1=A$1.14) (Reporting by James Regan; Editing by James Thornhill)