As my colleague Stuart reported earlier this morning, price increases for coking coal appear certain. Analysts believe iron ore prices will also increase in 2010 anywhere from 15-20%. Contract prices for iron ore during 2009 averaged $65/ton according to the Wall Street Journal and our own market research. Those prices could jump to $70-75/ton sometime in April, during the annul contract negotiation period. Though BHP would also like to sell iron ore on the spot market (they also wish to do so for coking coal), iron ore negotiations center around annual contract settlements with the other two key iron ore producers, Vale and Rio Tinto. The first contract that settles tends to form the “baseline for other countries and additional negotiations.
This past weekend included two key iron ore developments. First Chinese producer Baosteel will replace CISA (China Iron and Steel Association) as lead negotiator for iron ore contracts, according to Bloomberg quoting a website, QQ. As you may recall, CISA botched negotiations last year as many Chinese steel producers made end-runs around CISA to secure pricing for 2009. Several employees of Rio Tinto wound up in jail for allegedly leaking state secrets. That case remains unresolved.
BHP and Rio signed a definitive agreement to supply iron ore to steel producers around the world by combining Western Australian iron ore operations. The iron ore producers argue the joint-venture would allow each company to reduce operational costs. But steel producers will likely argue to European regulators that the proposed joint-venture will limit competition, even potentially creating a cartel (as if that isn’t what they face now).
MetalMiner developed an integrated steel production cost model adopted from Steelonthenet.com to help steel buyers better track raw material production costs. Readers can play around with the model plugging in both spot and contract pricing for coking coal and iron ore. We update these models quarterly so we can see price trends. Note: These models can’t predict actual demand but they can enable better planning and steel price forecasting.
If you are interested in downloading our latest integrated steel production cost model, fill out the form here and you can download the model for free
All of this means steel producers will end up increasing the price of steel despite the fact that China has a glut of material and new production continues to come on-stream. MetalMiner will address that second point in a follow-up post.
In the meantime, mills continue to announce price increases for steel. AK Steel just announced surcharges for electrical and stainless steel and Severstal increased sheet prices. Finally, scrap may become a big issue in 2010, this time in the form of shortages, placing additional price pressure on mills. MetalMiner will publish its complete 2010 steel price forecast in early January.