NERVES are frayed at the world’s steelmakers in the wake of proposals to merge BHP Billiton and Rio Tinto ?a combination that would see it control up to 40% of world iron ore seaborne trade.

Iron ore is a crucial ingredient in steelmaking and, after four consecutive annual price increases, steelmakers are worried that concentrating ownership will further weaken their bargaining power in future contract talks.

But what does that mean for South Africa’s iron ore producers? Generally, a merger between BHP Billiton and Rio Tinto is positive, neutral at worst.

Jan Steenkamp, head of ferrous metals at African Rainbow Minerals (ARM), says: “One less player in the market is good news for the smaller guys. The dominant producers get all the good prices while the smaller ones normally get lower prices.?

Steenkamp adds that by merging BHP with Rio there’s opportunity for ARM to seek out projects a combined BHP Billiton/Rio would be prevented from developing due to anti-competitive reasons

Ras Myburg, CEO of Kumba Iron Ore (KIO), says he can understand the alarm among steelmakers but doesn’t feel there’ll be much change in the status quo. “Contract prices are negotiated by the large players. While we cherish our independence we take their lead,? Myburg says.

Still, iron ore remains a good metal to be in. Between 1994 and 2003 annual contract prices barely moved before a 71% increase in 2004 saw the beginning of a price hike that hasn’t stopped since. For this year there’s hope that iron ore contract prices will increase between 17% and 19%, says Steenkamp.

Myburg is similarly optimistic. “Short-term fundamentals must support a strong increase [in contract prices].?An increase of 20% to 50% is the consensus, he says.

“Discussions over the next year’s contract price [April 2008 to March 2009] are of a 20% to 50% increase,?says John Meyer, of British-based stockbroker Fairfax. “We feel that the lower end of that range is more likely.?