In a move that many customers may view as controversial, miner Rio Tinto announced Thursday that it intends to charge steelmakers market prices [subscription required] for some critical raw materials, despite the existence of long-term contracts, The Wall Street Journal reported.

Rio Tinto (NYSE: RTP), via a clause in existing contracts, plans to charge spot-market prices for 10% of the iron ore in its customers' contract. Market prices are currently attracting bids in the $180-190 per metric ton range, more than double the $75-$85 per metric ton cost for Rio's fixed contract customers, The Journal reported.

Robust economic growth in emerging markets in Asia (particularly in China and India) and Latin America, combined with solid economic growth in Europe and the Middle East has propelled major price increases in minerals, commodities, raw materials and metals during the past three years.

Further, that global boom has repositioned suppliers and miners, such as Rio Tinto, into the catbird seat, from a negotiations leverage standpoint, as nations and companies compete to secure the increasingly valuable iron ore needed for the steel used to construct buildings, infrastructures, whole cities. Rio's shares were up $1.05 to $358.88 on the news in mid-day Thursday trading.

Controversial tactic

Still, although the higher price is likely to benefit Rio short-term, it remains to be seen if the company will be able to charge spot prices across its eligible contracts, or if Rio will be able to maintain constructive relationships with key customers.

"It is a highly controversial tactic, and I'm not so sure it won't backfire on Rio," economist David H. Wang told BloggingStocks on Thursday. "Even with the negotiation clause for 10% of the iron ore, customers will experience a shock to their operations. It's very hard for a company to absorb a 20% or 30% price increase in a key commodity or material, let alone a 100% price increase, and it wouldn't surprise me if Rio lost several customers."

Wang said Rio's stance underscores "the overheated nature of some aspects of the global economy" -- one where demand for commodities and minerals is so great that producers feel emboldened to "undertake tactics that, in a sense, amount to a form of highway robbery."

Wang said he doubted that steelmakers would seek to end relationships with Rio Tinto in the short-term, due to the surging market for steel products. Further, short-term, steelmakers may be able to pass on costs, he said, then later, after the steel market has cooled some, "they can come back and address who they want to do business with," -- in other words, which suppliers operated ethically and fairly during the mineral/commodity market's boom period.

Auto sector squeeze?

Still, there may be some sectors that may not be able to pass along the iron ore price shock, and its likely effect on steel prices. Namely, the auto sector. Global competition, with more than 30 manufacturers capable of distributing cars globally, limits an auto company's pricing power, analyst C. Leonard Bauer said Thursday. But these automakers will have no other choice but to pay the higher price for steel, squeezing their margins, Bauer said, in some cases, to zero.

"As if the auto sector, particularly the U.S. auto sector, needed this," Bauer said. "I've often criticized General Motors (NYSE: GM), Ford (NYSE: F) and Chrysler for their unwillingness to adjust quick enough, but it's awful hard to adapt when a key material, steel, rises 40 or 50% in cost in a year. There's only so much a company can do to maintain margins, and beyond that the car model simply is classified as unprofitable and the company will reduce production or take it out of production."

Bauer added that, if steel costs rise on higher iron ore costs, he expects U.S. automakers to use more substitute materials, including composites and plastics, where possible. That will hasten the arrival of lighter, more fuel-efficient cars, but it's not the type of hurdle Detroit needs right now. "Detroit's already battling high energy costs and a slowing U.S. economy. The last thing it needs is a spike in steel prices," Bauer said.