Iron ore prices reduce cost gap between China’s mills

Iron ore prices reduce cost gap between China’s mills

Two types of prices could be seen in the Chinese iron ore market in 2004: Long-term annual contract prices for large steel mills and spot market prices for small steel mills. Large steel mills normally sign long-term contracts with international mining magnates or buy shares in foreign mines with dividends, therefore ensuring a stable supply at prices subject to annual negotiations. In addition, these large mills also sign long-term sea transportation contracts. These factors allow them to obtain comparatively low iron ore prices. For instance, the iron ore CIF price in 2004 was only 400 Yuan/t. Small steel mills on the other hand have to purchase iron ore at much higher prices from the spot market or large steel mills since the smaller mills do not have a long-term stable supply. For instance, the spot market CIF price for iron ore containing 60% Fe generally hovers around 700 Yuan/t, but it reached 800-900 Yuan/t last year as small mills rushed to purchase the raw material. Experts estimate that large steel mills added several hundred million Yuan to their bottom lines through selling their unconsumed iron ore to smaller mills. At the end of Feb, CVRD and Rio Tinto signed agreements on iron ore prices for the 2005 fiscal year with China’s larger steel mills; however, these new price agreements have not led to an obvious price increase trend in the spot market yet. At present, despite a minor increase, the price remains at the 800-900 Yuan/t level, essentially the same level as seen at the end of 2004. Small and medium sized mills have been able to digest such high costs and still post profits due to last year’s spike in steel prices. In addition, traders and interested parties believe that spot price, which rose 200-300 Yuan/t year on year, has reached its market ceiling. Given the above, large mills will likely be forced to make greater adjustments this year as their costs are predicted to rise proportionally more than those of the smaller mills. It is estimated that pig iron cost will increase 200-240 Yuan/t, whereas small mills purchasing iron ore on spot market will face a slight cost increase of possibly 100 Yuan/t. Such a difference should present small mills with the opportunity to reduce the cost gap with large mills.