China Buying Iron Ore at Japanese and Korean Prices

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Commodities, Global Trade

We have covered this year’s China iron ore negotiations fairly extensively, primarily because iron ore pricing plays a significant role not only in integrated steel making costs but also on overall Chinese steel price competitiveness. Because China is the largest steel producer in the world, and nearly all of it comes via integrated steel making, iron ore prices serve as one of those “dashboard signals” we like to track. And though we don’t believe iron ore prices have a high correlation to overall steel prices, they do appear to correlate well with steel production. We’ll cover steel price forecasts in a future post.

While China finds itself in the mainstream press for its detention of a Rio Tinto executive and employees regarding misconduct associated with stealing state secrets over iron ore negotiations, US iron ore producer Cliffs Natural Resources has been quietly selling iron ore to China at the benchmark price level, or, in other words, at the price levels agreed to by the Japanese and Koreans who purchase from Rio Tinto and BHP Billiton.

This counters some of the earlier commentary (including ours) that China would be forced to purchase iron ore at spot market price levels that have reached nearly $100/ton.   Cliffs Natural Resources CEO Joseph Carrabba sees encouraging sales activity with shipments expected to total 8.5m tons out of Western Australia vs. an earlier estimate. Carrabba indicated his firm would sell at $60-65/ton while costs equate to $45/55 ton for ore coming from its Western Australian mines.

Though Cliffs Natural Resources hardly ever gets mentioned in conjunction with the Big 3 iron ore producers (BHP Billiton, Rio Tinto and Vale), the fact that the firm has struck some major deals with the Chinese at the current benchmark price level suggests that CISA will continue to have problems negotiating at or better price levels than the Japanese and Korean steel mills.

–Lisa Reisman

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