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Steel mills flummoxed as spot iron ore prices head north
By Zhang Qi (China Daily)
Updated: 2010-01-06 08:04
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Surging spot prices of iron ore delivered to China have further complicated this year's negotiations with key suppliers.
Price of the 63.5 percent iron-content ore rose to $129 per ton including freight yesterday, after India raised taxes on exports, up 6 percent from last week and more than 50 percent higher than the 2009 benchmark price reached by Australia's Rio Tinto, BHP Billiton, and Brazil's Vale with Asian steelmakers.
The bulk of the iron ore delivered to Tianjin port yesterday was from India, with hardly any supplies from Australia and Brazil, according to data from industry information provider .
Industry insiders said the rising spot prices and dwindling supplies from the three global miners have put pressure on the benchmark price.
The country's top iron ore negotiator, China Iron and Steel Association (CISA), for the first time admitted that the price rises would complicate negotiations.
Luo Bingsheng, vice-president of CISA, said he expects foreign iron ore miners to seek a 20-30 percent increase in the benchmark iron ore price for 2010. Given the fact that the country is committed to increase steel production this year, it makes the iron ore negotiations difficult for Chinese steel mills, according to the China Securities Journal.
China is expected to increase steel supplies by 8.6 percent this year to 621.5 million tons, according to a report from Mysteel consultancy. The nation's $586 billion stimulus spending has significantly boosted steel demand especially from automobile firms, home-appliance manufacturers and builders.
Iron ore from Australia and Brazil has been in short supply for the last two months.
"The three big miners have reduced their spot iron ore supplies for a few months to control prices and enhance their position in the negotiations," said a senior manager with a Beijing-based iron ore trading company.
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"We have to look for supplies from the spot market to bridge the ore shortfall," said the sales director of a Hebei-based steel mill that has long-term ore contracts with Vale and Rio Tinto.
Asian steelmakers may want to settle annual contract iron ore prices with leading suppliers sooner rather than later as the spot price rises, said Goldman Sachs JBWere Pty in a report.
"With spot iron ore now trading at a theoretical premium of 80 percent to the Japanese contract price, there must be a growing motivation for mills to lock in contract prices sooner rather than later," Goldman analysts led by Malcolm Southwood said.
In such a scenario the mills may be forced to "concede bigger price hikes than our plus 20 percent forecast" for Australian ore, he said.
Miners and Chinese steelmakers plan to complete the ore negotiations before April 1.
