Iron ore prices may hold in 2006

Iron ore prices may hold in 2006

Major iron ore producers will begin talks next month with major steelmakers to determine the iron ore prices for 2006. Various iron miners and steelmakers have begun announcing investments in iron mining as the time for negotiations approaches. This week, Australia's Rio Tinto and BHP Billiton announced capacity expansion plans for their Pilbara iron ore mining facilities. The two companies will spend nearly $4 billion for the investments. Caemi Mineracao e Metalurgica SA, a subsidiary of Brazilian Cia Vale do Rio Doce (CVRD), the largest iron ore producer, announced plans to invest $759 million over the next three years to increase capacity. These announcements can be regarded as an implication that the major iron ore producers will ask for price increases to cover their spending on capacity expansions. Furthermore, the announcements are also a message from iron ore miners that the demand for iron ore is very high and is continuing to increase. However, companies outside of Australia and Brazil might take away from the major ore producers' bargaining power. Indian iron ore miners have announced capacity increase plans, and Chinese steelmakers continue to meet with Indian producers to secure iron ore imports at favorable prices for 2006. Furthermore, metallurgical raw materials trading company Sinosteel, China's largest iron ore importer, announced investment in iron ore projects in Australia with Midwest Corporation. In the signing ceremony for the investment, the president of Sinosteel said that they expect a 5-10 percent decrease in iron ore prices for 2006. Major iron ore miners were able to get a 71.5 percent increase in 2005 thanks to a prosperous 2004 for steel industry. However, global steel markets experienced a down turn in 2005. The downwards trend was harshest in China, mainly due to the enactment of the country's new steel policy. China, the largest steel market in the world, is still currently in a down turn. Major Chinese steelmakers such as Baosteel and Wuhan Steel previously indicated that they would not accept any increase in iron ore prices for 2006. To sum up, following the high increase in 2005, iron ore miners will try to obtain a sound increase for 2006 prices, too. Steelmakers, on the other hand, will naturally insist on a decrease. Therefore, we might suggest that the equilibrium among the two forces will probably keep iron ore prices as are. Nevertheless, contrary to our expectations, analysts from Rio Tinto's sales department and Australian Macquarie Bank expect a 15 percent increase, claiming that Japanese mills will still take the lead in negotiations for the new price framework.