What the New Iron Ore Contract Benchmarks Mean for Steel Costs

by on

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.

–Lisa Reisman

Comments (2)

  1. Consolidated man says:

    Funny how it seems you are praising cliffs but they still have their iron ore mines idled. The mine they have in eastern Canada has direct shipping lanes to China at a cost 34$/ton lower than because of the reduced shipping costs yet they have that mine running a 1/3 capacity. Seems to people outside looking in that Cliffs simply does not know how to manage and will soon be gobbled up because of this little known about Wabush Mine and all of its key assets to feed the Chinese market on the spot market.
    Arcelormittal knows this…..they are still continuing with litigation against Cliffs on the Wabush mines sale agrred to in 2008 althought they dropped the lawsuit against US Steel. This is an interesting story to follow and if anyone has any info I’d love to hear it.

  2. admin says:

    Consolidated Man, I didn’t intend to praise or criticize Cliffs though I do think the way they set their prices may be a better route than the way the Big 3 set their contract prices. But I have a question for you, why would anyone run at greater capacity when the market won’t bear it? Isn’t it a good idea to take excess capacity off-stream if prices won’t support it? LAR

Leave a Comment

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.