SteelOrbis Shanghai
As the international iron ore negotiations have entered their critical period, the supply and demand sides of the discussions are doing everything they can to lobby for their own advantage. Due to the sharply rising steel prices in the international markets, along with the fact that demand is stronger than supply, the suppliers have great confidence in the prospects for raising the iron ore prices. Obviously, the strong competition for ore supplies is to the buyers' disadvantage.
At the beginning of the New Year, it is heard that India, which had just started to implement iron ore export tariffs last year, may raise its export tariffs further. The Indian Steel & Iron Department has proposed to the country's Ministry of Finance an increase in the export tariff for iron ore from the current rate of 10 percent to 15 percent. Of course, this is in fact the stance of the steel producers, and we will have to wait and see whether or not the government will accept the proposal. After all, India's thousands of large and small mines have been providing a great number of employment opportunities. In February 2007, India's Ministry of Finance proposed the imposition of an export tariff of Rupee 300/mt (approx. $7) on iron ores of all grades - a move which was opposed by suppliers and exporters. Eventually the government made some concessions, e.g. reducing the export tariffs on powder ore of grades below 62 percent to Rupee 50/mt.
As we can see from the result, the export tariff increase in India is only one factor but not the key to the significant increase in iron ore prices in 2007. In June 2007, Indian iron ore export offers to China were only at $70/mt CFR, while the current price is as high as $135-140/mt CFR.
So what about 2008?
The iron ore market has been in a sluggish state for a long time now; and so in order to sell their iron ore, the mines had no other choice but to give discounts to the steel mills. Even in the period from 2001 to 2007 when the demand for iron ore increased due to the booming international economic situation, mines mainly raised contract prices via negotiations instead of publicly announcing changes to spot trading.
In the 1970s, Rio Tinto sought to raise the iron ore price through an intransigent stance but met with boycotts from the Japanese iron and steel enterprises. As a result, most of its market shares in Japan were taken by another mining giant, BHP Billiton. After such a disaster, Rio Tinto has always attached importance to maintaining a long-term partnership with its customers and took a relatively moderate attitude in the 2005-2006 iron ore negotiations. At the beginning of the cooperation between Rio Tinto and Baosteel, the two parties agreed that Baosteel would not buy ores on the spot market while Rio Tinto would not sell ores on the spot market.
However, the situation as we see it in 2008 seems to have altered somewhat.
As reported by the Australian media, Companhia Vale do Rio Doce (CVRD) requested a price hike of 70 percent at the beginning of the negotiations. However, the company has not confirmed the news. A Chinese trader in Shanghai stated that at the beginning of the negotiations, China said it was ready to accept a 30 percent price increase while the suppliers sought a 50 percent hike.
In the current negotiations, the previously moderate Rio Tinto has adopted an aggressive style. Rio Tinto has announced that in 2008 the company is planning to sell 15 million mt of iron ore on the spot market, i.e. an expected 10 percent of its total output in 2008. It added that it has already bought three super ore carriers of 250,000 DWT each, specifically for ore shipment to China. Rio Tinto explained that in 2008 short-term, medium-term and long-term contracts would exist side by side - that is, apart from the original long-term contracts, contract prices for the short term and medium term will fluctuate with the market trend and be determined on CIF basis.
As reported by insiders, Rio Tinto plans to sell one million mt of iron ore on the spot market in China by means of public bidding - a move welcomed by medium- and small-sized mills in Shanxi and Hebei provinces. Currently several cargoes of iron ores of Grade 62-63 have been sold at the price level from $185-190/mt, 120 percent higher than the long-term contract price.
From the above we can see that the current spot price enjoys a premium of $88-90/mt over the annual long-term contract price. So if 15 million mt of iron ore are to be sold on the spot market, there will be $1.3 billion pretax profits more than that can be obtained from long-term contracts. The figure is nearly half of the profits obtained from all iron ores by Rio Tinto in 2007.
Obviously, Rio Tinto has radically changed its marketing strategy, which is reasonable enough given that enterprises are born to seek profits.
Besides, it seems that the forces of nature also stand on the side of the iron ore suppliers.
Not long ago, two iron ore companies subordinate to Rio Tinto issued a notice of ’force majeure' to Chinese enterprises that since the iron ore output and exports have been affected by hurricanes, as of 2008 only ninety percent of the quantities defined in long-term supply contracts can be fulfilled. Of course, the above action caused much discontent among the Chinese large-scale iron and steel enterprises and at the CISA as well.
CVRD has also announced that its exports will be reduced by 60,000 mt per day due to the closure of the Brazilian iron ore export port Itaguaí from January 7 to the end of February. In addition to the previous delay in delivery, it is expected that the supply of iron ore to the Chinese market will reduced by more than four million mt in the near future.
In contrast to the aggressiveness of iron ore suppliers, the buyers are soft-pedaling on the question.
For the purchasers, the most favorable factor is the recent sharp decline of the sea freight rates. Since December 14th last year, the freight rate from Brazil and Australia to China has dropped sharply, by around 40 percent. Especially in the latest three days of trading, the freight rates from the above two countries to China have undergone a record decline, totaling 18 percent and 21 percent respectively.
Since sea freight rates have decreased dramatically, iron ore suppliers have started to revaluate their sales strategies. After all, the good times will not last forever. Being too tough in the negotiations would affect the relationship with the purchasers, which in turn would affect the suppliers unfavorably from a long-term perspective.