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.