This week's news that Rio Tinto, the No 2 name in seaborne iron ore - after Brazilian supergroup Vale, and ahead of No 3 in BHP Billiton - has applied apparently deep cuts to contract iron ore prices, has in practice put prices back to levels seen in 2007, and, indeed, higher than those levels. The world's three, and totally dominant, seaborne iron names were already turning in super profits from iron ore during 2006, followed by further rounds of such profits in 2007 and 2008, with good signs of more to come.BHP Billiton's iron ore division EBIT (earnings before interest and tax) for 2007 was USD 2.7bn, on turnover for that division of USD 5.5bn, for an astonishing EBIT margin of 49.4%. With the exception of base metals, at 54.1%, iron ore margins were the highest across the group that ranks as the world's biggest diversified resources company, today boasting one of the world's truly bombproof balance sheets.The fundamental point, however, is that the seaborne iron ore trade constitutes one of the best businesses in the world, of any kind. The evolution of iron ore prices has taken place over a difficult and protracted timeframe, and the three senior names in the seaborne game are unlikely to allow any serious undermining of one of the world's most profitable businesses. Iron ore prices started to move during 2004, after more than two decades of trading in a churning band between USD 0.22 and USD 0.40 per dry metric ton unit (mtu).The individual pricing of iron ore products differentiates chiefly between lump and fines, with lump trading at a premium to fines. Iron ore prices roared upwards in 2005, but the 2008 settlements were unprecedented both as to value and also percentage escalation.On 23 June 2008, Rio Tinto announced annual that contract iron ore fines prices had been raised by 79.9% year-on-year to USD 1.4466/mtu (dry metric ton unit), while its lumps price was hiked up by 96.5% to USD 2.069/mtu. This week Rio Tinto cut its contract fines price to USD 0.97/mtu, and its lump to USD 1.12/mtu.Rio Tinto's contract iron ore prices

US cents per dry metric ton unit

 2007

 2008

Change

2009

Change

 Pilbara Blend Fines/Yandicoogina Fines

80.42

144.66

79.9%

97.00

-32.9%

 Pilbara Blend Lump102.64

201.69

96.5%

112.00

-44.5%

The latest round of price adjustments leave contract iron ore prices well above those that were settled for 2007. The annual settlement of contract iron ore prices has become increasingly tense, and the iron ore spot market is slowly but surely coming into its own.  Leaving aside price evolution on that front for now, the downward pressure on iron ore prices generally since around mid-2008 has triggered contractions in activity at lower grade iron ore mines.Recent estimates by a Rio Tinto executive put current Chinese mainland production down by up to 50% from rates seen during 2008. In terms of country production, China ranks as the biggest iron ore miner by far, with around 770m tonnes of the stuff dug out during 2008, followed by Brazil, mainly Vale, with 390mt, Australia with 330mt, India with 200mt, and Russia with about 100mt.During the first quarter of this year, Vale reduced its iron ore production by 27% to 49.8m tonnes, compared to the first quarter of 2008; pellet production was slashed down 73% to 2.9m tonnes. Even so, Vale's adjusted EBITDA from ferrous minerals, mainly iron ore, was reported as USD 2.2bn for the first quarter of 2009, compared to USD 2bn for the first quarter of 2008.Iron ore remains the backbone of Vale, by a long way; its USD 2.2bn EBITDA from ferrous minerals for the first quarter of this year comprised the vast bulk of its group EBITDA, at USD 2.3bn. With ferrous minerals revenues of USD 3.5bn for the quarter (including minimal contributions from ferroalloys and manganese), Vale's EBIDTA margin for ferrous minerals was 63%. The comparative figure for the first quarter of 2008 was a more modest 47%.For the first quarter of 2008, the USD 2bn EBITDA contributed by ferrous minerals can be compared to the USD 3.7b EBIDTA earned by Vale as a whole. Vale ranks as a diversified miner, also producing nickel, copper, kaolin, potash, platinum group metals, gold, cobalt, aluminium, alumina, bauxite, coal, and others.In Vale's nonferrous division, EBIDTA was trashed from USD 1.8bn for the first quarter of 2008 to a mere USD 151m for the first quarter of this year, echoing the agony of countless miners around the world. For their part, investors have largely forgiven Vale its misadventures (for now) outside the iron ore arena, and have continued to recognise the huge value of its core business. Most commodity prices have recovered sharply over the past, in particular, five months, pointing to supportive margin rises in Vale's nonferrous division, and also even for ferrochrome and manganese.MINING'S TEN MOST VALUABLE NAMES

Stock

From

From

Value

price

high*

low*

USD bn

BHP Billiton

GBP 14.36

-30.1%

96.3%

142.22

Vale

USD 19.26

-52.9%

118.9%

94.37

Rio Tinto

GBP 27.28

-57.7%

174.2%

63.07

Shenhua

CNY 25.32

-49.5%

57.5%

61.15

Anglo American

GBP 16.46

-54.0%

81.7%

35.39

PotashCorp

CAD 130.86

-46.9%

113.1%

34.78

Barrick

USD 37.00

-29.5%

114.2%

32.31

NMDC

INR 387.20

-16.9%

236.1%

32.19

Suncor

CAD 36.62

-48.6%

94.8%

30.87

Xstrata

GBP 6.52

-73.5%

125.6%

30.72

* 12-month

Seaborne iron ore stands tall as one of the most imperious franchises in the world. The Carajás name, synonymous with the world's biggest miner of seaborne iron ore, has become one of the most powerful tollgates on international waters, with Rio Tinto and BHP Billiton, both with iron ore production out of Australia, the only other serious members of a truly exclusive club. These three dominant names mine huge, high grade deposits, and control, if not own, much of the logistics vital to the trade: rolling stock, railway lines, ports, handling facilities, and, in the case of Vale, an entire monster shipping fleet. During 2008 Vale invested USD 1.6bn in 12 large iron ore carriers.BHP Billiton

2008, USD bn

Divisional

Underlying

EBIT

revenues

EBIT*

margin

Petroleum

9.547

5.489

57.5%

Aluminum

5.746

1.465

25.5%

Base Metals

14.774

7.989

54.1%

Diamonds and other

0.969

0.189

19.5%

Stainless steel materials

5.088

1.275

25.1%

Iron Ore

9.455

4.631

49.0%

Manganese

2.912

1.644

56.5%

Metallurgical Coal

3.941

0.937

23.8%

Energy Coal

6.560

1.057

16.1%

Group/other items

0.481

-0.394

-81.9%

Totals/average

59.473

24.282

40.8%

* Earnings before interest and tax