Iron Ore Prices May Jump 25% Next Year, Zhevago Says (Update2)

May 27 (Bloomberg) -- Iron ore prices may jump as much as 25 percent next year after weakening through the rest of 2010 on slower Chinese demand, said Kostyantin Zhevago, head of Ferrexpo Plc and developer of Europe's biggest reserves of the material.

"Even modest growth of between 0.5 percent and 2.5 percent in the global economy will keep the consumption of iron ore at very robust levels, supporting very good fundamentals in terms of price," the 36-year-old billionaire said in an interview.

Vale SA and BHP Billiton Ltd. last month won 90 percent price gains in contract negotiations with customers as stimulus spending in China drove use of the steelmaking material. Efforts by the country to cool a property boom have since pushed Chinese iron-ore prices for immediate delivery down 23 percent from an April 21 high for the year on concern steel demand will slide.

While prices will drop 10 to 20 percent over the third and fourth quarters, semi-processed pellets will still average about $140 a metric ton in the year ending April 2011, Zhevago said in Zurich, where the company's board meets. Pellet prices have risen to as much as $145 in the second quarter from about $70 in the first, he said. Ferrexpo sold pellets at about $66.30 a ton last year and $124.60 in 2008.

Ferrexpo advanced 8.4 percent to 256.3 pence in London trading today, the biggest gain in almost three weeks.

Output Expands

Ferrexpo's pellet production rose to 3.2 million tons this year to April 30, a 20 percent gain from a year earlier, the company said today in a statement. With "very strong" demand and a "material improvement in iron-ore markets and current pricing levels, the group is in a position to increase its level of expenditure," it said.

The company, which claims the biggest iron-ore reserves after Vale, Rio Tinto Group and BHP, will exceed this year's output target of 9.5 million tons at its mine in Ukraine by about half a million tons, said Zhevago, who began his career by setting up a securities firm at the age of 18. Ferrexpo plans to double capacity to an annual 20 million tons in five years.

It has also discussed cooperation in transportation and storage with New World Resources NV, a Czech coal producer, Zhevago said. NWR's parent owns a 25 percent stake in Ferrexpo.

"We are in constant talks," Zhevago said. "We see the yields and the efficiencies we can squeeze out of the combined entity. But this is at very, very, very early stages."

Asian Accords

Zhevago, who owns 51 percent of Ferrexpo, also aims to sign off-take agreements with Asian clients to fund growth.

Ferrexpo had delayed its expansion, estimated to cost more than $1 billion, on Oct. 29, 2008, as the world financial crisis crushed commodity prices and credit markets, prompting Zhevago to take over as chief executive officer from Mike Oppenheimer.

The company lost a quarter of its market value that day, the biggest slump since its London initial public offering in June 2007, and hit a record low of 21.5 pence by Nov. 21. The shares, the first from a Ukrainian company to list on the London Stock Exchange, have since advanced 10-fold as the world's governments employed fiscal spending to support economic growth.

Even as state spending is now being reined in around the globe, Zhevago expects iron ore supply to be restrained, helping to support prices should demand weaken. "If there's any downturn, the production is very elastic and automatically high- cost producers would reduce production volumes," he said.

Australia Tax

As nations seek to repair their finances following the stimulus measures and a collapse in tax revenue because of the economic slump, they may be tempted to follow Australia's example in proposing higher tariffs on the mining industry.

"Governments will follow all over the world but they need to be careful," Zhevago said on May 20. "Australia, Canada, South Africa, Brazil should recognize that taxing the very big capital-intensive iron ore mining industry will overhang global economic development. The product will end up much higher priced and naturally limit the amount of consumption."

Australia this month announced a planned 40 percent tax on profits of resource companies from 2012. BHP, Rio, Xstrata Plc and Fortescue Metals Group Ltd. have criticized the plan and said they are reviewing investments in the country.

Ferrexpo's mine is located in Ukraine's central region of Poltava, where extraction began in 1960 and the first iron ore concentrate was produced in 1970, according to the company's website. Privatisation of the mine began in 1995 and Zhevago bought his first stake in 1996, the website shows.

Zhevago, who jets about 900 hours a year on his Bombardier Global Express mainly between Kiev, London and Zurich, made his fortune buying stakes in privatized companies, restructuring the assets and selling them to international investors. He owns businesses in industries from pharmaceuticals to consumer goods.