Though many had forecast that the benchmark iron ore contract price would decline by 35-40%, Japan’s Nippon Steel and Korea’s Posco each settled for a 33% price decline. But what’s good for the goose is not necessarily good for the gander. According to this article, Chinese steelmakers will reject this cut and likely hold out for more. The classic sourcing strategy of leverage rests with the Chinese as they buy half of the world’s traded iron ore, according to this article.
Historically, the first contract price often sets the trend for the balance of the negotiations. Last year, Vale achieved a 70+% price increase first, but the other two (of the Big 3) iron ore producers got a much higher price increase. And though some of the press has concluded that this year’s contract is one step closer to being accepted as global benchmark, we disagree and therefore will call it that the Chinese, led by Bao Steel will secure a 35% price cut from last year. Where does that leave the current global benchmark process? We’ll get to that in a minute.
In the meantime, mining firm Cliffs Natural Resources, America’s largest iron ore pellet producer, sets its price based upon a formula using three factors: the pellet price, current steel prices and the company’s costs, according to this Reuters article. Ironically, this formula probably makes more sense then the higgle/haggle process currently in place. In fact, some of China’s largest steel producers plan to increase their sales prices for the July ” Sept quarter, according to Steel Guru but may only do so modestly. The article goes on to say that any (major) price increase by one of the major mills could have a knock-on effect in that smaller steel mills ramp up production to grab a piece of that pie. The Japanese steel-makers, therefore predict a much smaller increase from the Chinese producers, to help keep the supply/demand balance in check. The Chinese government also seeks to limit production through a series of initiatives we have previously reported on including shuddering inefficient mills and limiting financing.
Perhaps the entire iron ore benchmark contract process will go by the wayside and the Big 3 iron ore producers will take a page from their North American peer, Cliffs Natural Resources in balancing a range of factors. What do you think?
We’ll continue to update these pages on the settled iron ore pricing for the Chinese steel mills.