May 12 (Bloomberg) -- ArcelorMittal, the world’s largest steelmaker, said it will raise European steel prices as much as 16 percent after an “overwhelming” surge in the cost of iron ore and coking coal.

ArcelorMittal will increase benchmark European hot-rolled coil prices to 650 euros ($825) a metric ton in July, from 560 to 620 euros currently, said Michael Pfitzner, head of marketing and commercial coordination at the Luxembourg-based company. Prices may climb a further 20 to 30 euros later in the third quarter because of a weakening euro, he said.

“We have to pass on our additional raw material costs,” Pfitzner said in a telephone interview in London today. “The impact of raw materials has become so overwhelming on our total cost structure that there is no way to keep these kind of changes on our side alone.”

Steelmakers face paying for iron ore and coal on a spot basis or via quarterly supply accords after the end of a four- decade-old system that fixed prices annually. Mining companies abandoned the system last month to capitalize on iron-ore spot prices that have more than doubled in the past year.

ArcelorMittal fell 9.5 cents, or 0.3 percent, to 28.07 euros in Amsterdam trading.

Chief Executive Officer Lakshmi Mittal said yesterday the company is talking to customers who normally buy steel on fixed- price contracts about a new pricing mechanism.

Pricing Formula

“We will continue to talk on an annual basis and have annual contracts,” Pfitzner said. “We are currently developing, together with our customers, a formula which allows prices to automatically adapt to the latest change in big cost elements like raw materials.”

Hot-rolled steel coil, a benchmark product used in cars and buildings, cost 575 euros a ton as of May 5, according to data compiled by Metal Bulletin. Coil climbed 41 percent in the first quarter, the steepest increase in six years. Prices fell 13 percent in 2009.

ArcelorMittal will raise cold-rolled coil to 730 euros a ton and galvanized steel to 740 euros a ton in July, Pfitzner said.

--Editors: Simon Casey, Dan Weeks

To contact the reporter on this story: Thomas Biesheuvel in London tbiesheuvel@bloomberg.net

To contact the editor responsible for this story: Simon Casey at scasey4@bloomberg.net

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