Iron-ore prices are already high, and recent developments should keep them from lowering anytime soon.
Regular readers of our affiliate blog, SpendMatters, might have caught my guest piece on the returned interest in vertical integration in the steel industry. In the past, vertical integration allowed steel-producing companies to control their product’s entire lifespan, beginning with raw material retrieval in their own iron-ore mines. Although this process became outdated in recent decades, excess capacity in the market and record iron-ore prices have led steel producers to recognize the benefits of this “old school” method. The Wall Street Journal listed several companies that consider Brazil the optimal place to head back to the basics of vertical integration: ArcelorMittal, Japanese steelmakers, and steelmakers from China, India and Russia.
The Wall Street Journal made a point to note that newcomers are avoiding Australia, since the country’s iron-ore reserves are “controlled by BHP Billiton and Rio Tinto, meaning there are almost no opportunities for a newcomer to gain a foothold in the market. Moreover, Australia’s logistics and transportation system is nearly at capacity and labor costs are higher.” A few days after this article was written, however, the story became even more interesting. Now, Australia’s iron-ore supply is expected to tighten even further.
According to Purchasing.com, “Rio Tinto earlier this week declared force majeure on iron ore shipments after an accident involving a rail car damaged an ore dumper at an Australian port … And today reports surfaced saying BHP Billiton has suspended its West Australian iron ore operations after a second fatal accident in two weeks, halting output from mines supplying about 14% of annual global exports. All of this comes as Brazilian miner Vale pushes an additional iron ore price hike in the range of 13-20% with Chinese steelmakers, who are resisting the hike.”
The iron-ore market is expected to remain tight until 2011, at the earliest.