According to Australia and New Zealand Banking Group Limited (ANZ), downward trend of steel prices in China may lead iron ore prices to decline as much as 40 percent in 2009. This figure is much deeper than the market expectations of a 20-30 percent drop.
"China is the key market for iron ore demand accounting for a massive 48 percent of seaborne supply in 2008. The problem is that China steel prices are still trading at an average 20 percent premium to international prices, suggesting the high level of domestic steel stocks will unlikely be reduced by increased exports. The worry for iron ore and coal producers is that high steel stocks will allow steel consumers to delay purchases for some time, creating further downward pressure on China steel prices and ultimately, iron ore prices," said ANZ commodity strategist Mark Pervan.
Brazilian Comphania Vale do Rio Doce , Australian Rio Tinto and BHP Billiton are currently negotiating with the Asian steel industry representative, Baosteel Group, to set a new annual benchmark price. Although the two groups come closer to an agreement around March, talks can drag on for longer.
"The timing couldn't be better for steel mills currently locked in negotiations with iron ore producers," Mr Pervan said.