BHP and 2010 Iron Ore Negotiations

by on

BHP should be a good stock buy in spite of the strength of the mining sector and stock gains it has made last year. If you thought last year’s iron ore negotiations were protracted and in the end rather acrimonious they will be nothing to this year. For a start China can’t get its act together as to who will represent them. Officially Baosteel is taking back the mantle from CISA who made such a mess of it last year. In practice they have yet to engage the big three BHP, Vale and Rio, in discussions and risk being left behind by more fleet of foot Asian and European mills keen to settle their contract prices for the year ahead before the spot price goes any higher. According to the Financial Times, since the 1960’s, representatives of the world’s largest mining companies have held secretive negotiations to set prices for contracts with the big steel producers. Traditionally, the first deal between a miner and a major steelmaker set a “benchmark which was followed by the rest of the industry.

What’s the big deal this year and why should the rest of us worry you may ask? Well the big deal is that 95% of all the metal used in the world is steel and steel is made from iron ore. Iron ore is the world’s second largest commodity market by value, after crude oil, so it represents billions of dollars by value and just about everything metallic we come into contact with contains some (if it is not wholly made from) steel. So the price of the raw materials is a pretty big deal for the global economy and for us as individuals and businesses. Why is it a big deal this year? Well for the much of the last decade the iron ore market has been in rapid transition. Back in 2000, iron ore was mined and consumed in a more diverse fashion but as China’s demand has risen the country has come to dominate representing 52% of the buying market and importing three times more than Europe the next closest trading block. At the same time, the supply side has consolidated, invested and grown such that now just three producers Vale (240mt) Rio Tinto (188mt) and BHP Billiton (138mt) dominate the seaborne trade market of 849 million metric tons (2008 figures from the Financial Times).

China has ramped up not just steel production but consumption of all metals over the last twelve months at an ever accelerating rate. In one Telegraph article, economists are quoted as estimating industrial output grew in December by 25% bringing fourth quarter GDP growth to 11%. In the process, China is sucking in metals from companies like BHP with no immediate sign of an end to growth. Iron ore imports jumped 22% in December to 62.2m tons the second highest ever on record and total shipments into China were 80% higher than the same month the year before. All this puts the Chinese in a difficult position regarding the annual contract negotiations because the suppliers have two ways to sell, either by the annual contract price that expires in April or on the spot market. With demand outstripping contract tonnages set last year the spot price is trading at a steep premium. In December it hit US$106.9 per metric ton on the basis of 62% Fe content, including freight. In January it hit US$ 124.8 per metric ton, some 73% over last year’s contract price. Analysts were predicting a 30% increase in the benchmark price this year, mining groups are looking for more and according to the broker Nomura could be aiming for 40 or even 50% increases.

If the miners are successful it will put further pressure on steel producers to raise prices or shutter capacity if margins come under even more pressure in the year ahead.

–Stuart Burns

Comments (2)

  1. beto says:

    what will happen to consumer product prices if the agreed prices go up by 50%?

  2. admin says:

    You raise a great question. Iron ore and coking coal represent a large portion of total steel costs for integrated steel producers. So if they go up by 50%, depending on their actual percentages of cost to produce a ton of steel via an integrated steel mill, the total cost of the steel goes up. As for what the raw material (metal) value is for an appliance, I’m not sure but probably less than 25% of the overall value. Our steel price predictions (forthcoming) will have models within them that could calculate this impact. They will be available within the next 10 days. 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.