2009: Iron Ore Surplus; Steel Prices to Fall Further

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Ferrous Metals

Bloomberg reported that China, the world’s largest iron ore consumer, said the global market for iron ore will be in surplus in 2009. This is one year earlier than expected, as the credit crisis slows economic growth and orders from steelmakers.

The China Iron & Steel Association said at a recent conference in Qingdao that all Chinese steel producers were unprofitable in October as steel prices dropped though raw material costs remained high. Chinese domestic spot hot rolled coil prices are down some 42% since June according to our own MetalMiner IndX(SM) to be launched the week of October 27. Although spot iron ore has generally come down and spot coal prices have eased, most material is supplied on long term annual contracts which are not due to change until March 2009. Most spot iron ore sales come from India and have already fallen to a 19 month low according to the report. As China seeks to boost domestic production and cuts imports in the face of falling demand, iron prices for 2009 are bound to fall. That will create the room for steel producers everywhere to reduce prices although majors like Arcelor Mittal have gone on record as saying they would rather cut production than let prices fall so expect resistance from the mills to follow the raw material cost downs However they may have no alternative as producers elsewhere drop prices in an effort to secure sales which have declined as buyers see prices weakening. We expect this to be part of a long term trend running through 2009. Raw material costs are coming down and the 2009 iron ore contract, as it  moves onto a quarterly contract next year, should follow the reduced demand.

In addition, lower freight costs should also yield lower raw material factory gate prices for steel producers everywhere.

–Stuart Burns

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