Iron-Ore Prices Hold Out

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SBB reported in a recent newsletter that car output in Spain fell by 49.9% year-over-year in August, although it was bizarrely only expected to drop 5.5% for 2008 as a whole. That either suggests production has been very much higher year over year during the first six months of this year to make up the difference or the 5.5% decline is wildly optimistic. We suspect a bit of both.

The housing market in Spain was reported by some as being catastrophic, recording up to 50% drops in home starts over one year and inventories of unsold homes jumping from 16.4 to 24.5 months on a national scale. Compared to 2006, the collapse is even more perceptible as projections for 2008 anticipate about 300,000 home starts while they anticipated more than 900,000 in 2006, corresponding to a near 70% drop. The situation in Spain is a microcosm of much of the rest of Europe. Italy, Ireland, increasingly the UK and large parts of Eastern Europe ” housing and with it consumer confidence is in decline. With car production and construction slumping, consumer confidence and hence consumption will follow and hence steel demand will drop. The rapid rise in iron ore and steel prices has been on the back of rising demand from the emerging economies and mature economies alike. Most commodities have come off by up to 50% over the last 12 months in expectation that demand will decrease but not so iron ore.

Iron ore and coking coal alone have held up even as other raw materials such as scrap have eased. We ask how long before we see a drop in iron ore prices. Just last month Vale pre-empted the usual October start of negotiations for 2009 with an opening shot at matching the Australian miners prices by pushing for interim price increases even on their 2008 contract prices in clear breach of contract. Surely falling global steel growth and rising demands from suppliers for ever higher prices is going to cause a crunch point to be reached in 2009. North America has maintained an illusion of strong steel demand but what has really happened is a weak dollar has restricted imports and boosted exports creating the impression of shortages. Demand is in fact down with the construction industry in recession, automotive in negative territory (both in terms of absolute numbers of cars made and in the size of cars made, the switch from pickups to compacts uses significantly less steel per unit) and consumption slowing now the fiscal boost of the summer has worked its way through. At some point soon a cooler steel market will give the mills the backbone to hold out against ever higher raw material costs. The 2009 negotiations should prove interesting.

–Stuart Burns

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