ArcelorMittal (MT), the world's largest steelmaker by volume, cautioned that a move toward spot iron ore sales and the announced iron ore joint venture between Rio Tinto PLC (RTP) and BHP Billiton Ltd. (BHP) could adversely affect its business.

"The raw materials industry is highly concentrated and suppliers in recent years have had significant pricing power," ArcelorMittal said in its 20F annual report published at the Securities and Exchange Commission.

"Further consolidation among suppliers--for example, the announced iron ore joint venture between mining companies BHP Billiton and Rio Tinto--would exacerbate this trend."

The world's three largest iron ore miners--Brazil's Vale SA (VALE), Rio Tinto and BHP Billiton--accounted for nearly 70% of the world's sea-borne traded iron ore market in 2008.

Rio Tinto and BHP announced near the end of last year plans to create an iron ore joint venture that would reduce production costs and produce iron ore more quickly by combining mining operations in Western Australia. Sales and marketing would be kept separate from the joint venture.

Steelmakers around the world, particularly those that depend on other miners for a substantial portion of their iron ore requirements, are adamantly opposed to the merger. The World Steel Association and other regional steel associations have all urged relevant authorities to reject the joint venture on grounds that it would concentrate too much iron ore pricing power in the hands of an even smaller group of mining companies.

ArcelorMittal is likely to be less affected by the joint venture than some of its peers since it benefits from substantial captive sources of iron ore and coal. In 2009, ArcelorMittal was 60% self-sufficient in iron ore and 20% self-sufficient in metallurgical coal, another ingredient used in steelmaking.

Nevertheless, the steelmaker still purchases a significant portion of its raw materials under long-term supply contracts, and therefore depends on outside sources such as Vale for iron ore.

The three miners are expected to seek a 40% rise in annual benchmark prices in 2010, according to industry analysts, after agreeing to a 28% to 33% cut in annual prices during 2009 when the global economic demand took a bite out of steel demand.

Vale and BHP have also signaled their desire to push towards a short-term iron ore price system rather than an annual benchmark system where prices are negotiated annually between the world's three largest miners and Asian steelmakers, the world's largest steel producers.

ArcelorMittal said in its report that such a move toward spot iron ore sales rather than long-term fixed-price contracts would cause steelmakers to "face increased exposure to production cost and price volatility, which may in turn reduce their access to reliable supplies of raw materials."

The company said any prolonged interruption in the supply of raw materials or energy, or increases in costs which ArcelorMittal cannot pass on to its customers, could adversely affect its business, financial condition, results of operations or prospects.

Company Web Site: http://www.arcelormittal.com

-By Alex MacDonald, Dow Jones Newswires; +44 (0)20 7842 9328; alex.macdonald@dowjones.com
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