New 2008 iron ore price pushes up equilibrium price of steel products

Wednesday, 27 February 2008 13:31:34 (GMT+3)   |  
       

On February 18, Brazilian iron ore giant Vale confirmed officially on its website the conclusion of its iron ore price negotiations for 2008 with Japan-based Nippon Steel Co. and South Korean steelmaker POSCO. Accordingly, the iron ore prices for Southern System fines (SSF), FOB Tubarão, increased by 65 percent relative to 2007. At the same time, due to its recognized superior quality, it was agreed that the price for Carajas iron ore fines (SFCJ) will have a premium of US$0.0619 per dry metric ton Fe unit over the 2008 price for SSF. Therefore, the new reference prices per dry metric ton Fe unit for 2008 are US$1.1898 for SSF and US$1.2517 for SFCJ. Given the premium of US$0.0619 per dry metric ton Fe unit for SSF, the price of 63.5 percent iron ore concentrate will be $75.5523/mt, up $29.7625/mt over last year.

Meanwhile, some other companies such as ThyssenKrupp and Japanese producers Nisshin Steel, Sumitomo Metals, Kobe Steel and JFE have also accepted the new contract price. On February 22, Chinese steelmaker Baosteel announced its official agreement at the new price. So far, only ArcelorMittal has not officially accepted the price increase in question, but it would only seem to be a matter of time before it does so.

Thus, the international iron ore negotiations for 2008 have practically come to an end, with only Rio Tinto holding out for more premiums for freight rates.

Due to the opacity of the international iron ore negotiations, observers on the outside are often in the dark about negotiation developments, and this sometimes gives rise to misunderstandings. In such a context, there were heated discussions in China as the results of the negotiations came out; some reporters even mentioned the 2005 iron ore negotiations, indicating that the Japanese steel producers had got the better of their Chinese counterparts once again.

In the current negotiation system for the international iron ore talks, suppliers and international steel producers are represented respectively by Vale, BHP Billiton and Rio Tinto on one side, and Baosteel, Nippon Steel (POSCO) and ArcelorMittal on the other. During the talks, the parties involved regularly exchange views and information regarding the progress being achieved. According to the present negotiation system, it is more important for the negotiations to continue instead of being rushed to a conclusion if any one of the six participants fails to agree with the others. That is to say, with regard to either the increase of 71.5 percent in 2005 or the latest 65 percent increase, Baosteel (and also the CISA and other major Chinese mills) had already been informed in advance and had also accepted the price increase. It would be groundless to say that the Chinese mills have been cheated by the Japanese steel producers or that the Chinese mills are being obliged to accept the price increase against their will.

Increasing demand and the depreciation of the US dollar have also contributed to the significant iron ore price increase for 2008.

Owing to the lower quality of Chinese iron ores and the rising costs of exploitation and beneficiation, and especially the growing domestic demand, China relies more and more on imported iron ores. In 2007, China imported 383.09 million mt of iron ores, with an increase of 56.79 million mt or 17.4 percent year on year.

At the same time, steel prices have gone up sharply, thereby leaving much upward room for the 2008 iron ore prices. Compared with a year ago, in China the current scrap price has increased by 50 percent, pig iron by 71 percent, billet by 50 percent and coke by 79 percent. Iron ore concentrates which stood at RMB 633/mt a year ago have risen by 87 percent to RMB 1,238/mt ($173.4).

In addition to the abovementioned details, given the strong depreciation of the US dollar along with the tight availability of iron ore, iron ore suppliers have had to greatly raise their prices in order to cover the losses caused by the exchange rate.

The AUD/USD exchange rate stood at 0.7892 on January 1, 2007, rising 11.02 percent to 0.8762 by January 1, 2008. As reported by the Brazilian Central Bank, the exchange rate of the BRL to the USD increased in value by 20 percent over the same period. Thus, the depreciation of the US dollar has led to a 20 percent increase in the iron ore price. Moreover, the dollar has not yet halted its depreciation trend.

The significant hike in the iron ore price has pushed up the equilibrium price of steel in the global markets to a new height. According to the International Steel & Iron Institute, in January 2008 the global output of BF iron was 81.85 million mt, while global crude steel production reached 113 million mt, indicating that crude steel is mainly made from basic pig iron. Thus, as a result of the increase in pig iron costs, global steel prices will move on a higher level.

This year, the contract price of iron ore has increased by 65 percent, approximately $30/mt (calculated according to 63.5 percent iron ore concentrates for Vale's Southern System fines), entailing a rise of $48/mt in pig iron costs. Taking freight rates into consideration (since the freight rates also went up greatly last year), if the freight rates increase by $20/mt compared with 2007 for ex-Brazil and ex-Australia to China, the cost of pig iron will increase by $68/mt (approx. RMB 470/mt).

However, it should be pointed out that the price of imported Indian iron ores has already increased, based on the expectation that the iron ore price will see a strong upward movement in the Chinese market. Thus, given the big rise registered in Chinese steel prices in the fourth quarter of 2007 along with the price surge seen after the Chinese New Year holiday, it may be said that the iron ore price increase has already been consumed by the Chinese steel market. Future price increases in the Chinese steel market will not necessarily be attributable to the 2008 iron ore price increase.


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