The steel industry is braced for an increase of up to 50 per cent in the contract price of iron ore next year as a result of strong demand from China and lagging supply, industry executives and analysts have warned.
Mining companies are struggling to increase iron ore output in Australia, the world’s biggest exporter, while the quality of Chinese domestic iron ore production fails to improve. In addition, India’s government has imposed export tariffs to keep its local steel industry well supplied.
The iron ore spot market has already seen price increases of up to 145 per cent over the past year. Excluding freight costs, Indian spot prices have surged this week to $130 a tonne, up from $53 a tonne a year ago. Australian and Brazilian spot prices have jumped 39 and 71 per cent respectively.
Dan Smith, a metal analyst at Standard Chartered in London, said the spot market was generally a good indicator of underlying supply and demand balances, and provided the basis for the contract negotiations.
“With the spot market getting even tighter it seems that steel makers are in a weak position,” added Mr Smith, who forecast an increase of 50 per cent.
The prospect of a strong price rise comes against the backdrop of slowing growth in the US and Europe. But China and other Asian emerging countries are set to continue rapid expansion, says the International Monetary Fund.
The negotiations between the steelmakers, led by Baosteel of China, and the mining companies are set to start in the next two weeks and cover the price for long-term contracts for the year starting in April 2008.
Morgan Stanley has raised its forecast to a 50 per cent rise in iron ore prices for 2008 “to reflect an exceptionally tight market”. Merrill Lynch and Macquarie Bank also forecast a 50 per cent increase while JPMorgan forecasts a 25-30 per cent rise.
Rio Tinto, BHP Billiton and Brazil’s Companhia Vale do Rio Doce produce about 70 per cent of the world’s shipped iron ore.
Tom Albanese, Rio Tinto chief executive, said last month that iron ore “spot prices were rising” and described the market as “tighter than a few months ago”.
The iron ore price increase, the sixth consecutive rise and the second largest in recent history after a 71.5 per cent jump in 2004, would come on top of record freight costs and surging coal prices. Iron ore, coal and shipping cost are the key elements of the steel industry cost structure.
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