Chinese Iron Ore Negotiations Suggest Miners Believe Prices Will Remain High

It’s almost an old story now to read about how China’s steel mills will likely only enter into quarterly contracts with the Big 3 iron ore mining firms as spot prices have hit $150/ton CFR China. China, like last year (and we haven’t even gotten to the Rio Tinto employees who pleaded guilty earlier this week to bribery charges following their arrests last fall) finds itself between a rock and a hard place. Despite having the largest production capacity of any country on Earth, in this round of negotiations, China will either have the option to move to a quarterly contract with steep price increases of 50-70% or opt for a +/-114% increase on an annual basis, currently offered by Vale. Is this the end of the annual contract? Probably, to some degree, until prices start dropping again and the iron ore producers decide a long-term contract has more value than trying to capture rising prices on a quarterly basis.

We have often discuss, on these virtual pages, the impact of iron ore prices on overall steel costs. In markets where demand remains vibrant (e.g. China) price increases can stick. But in markets with sluggish or fragile demand (e.g. the US and Europe) price increases can be difficult to make stick, so to speak. Buyers may wish to keep a close eye on US steel production capacity. According to this week’s American Iron & Steel Institute Raw Steel Update report, domestic capacity utilization has now increased to 71.1%. But as we also reported earlier this week, consumer demand remains sluggish, if not in downright recession territory, despite pretty positive automotive sales announced by the major news sources, the last week has witnesses declining automotive sales according to the Consumer Metrics Institute, which leads the government’s official numbers by an estimated 17 weeks.

So if we look at raw material capacity utilization and consumer demand numbers particularly around automotive and commercial construction, one can see a potential misalignment. And therein lies the thin edge of the wedge.

Though the new shortened iron ore contracting cycle will create greater price volatility (and hence risk) for steel producers, now might be a good time explore supply options offered by the “Non-Big 3 such as Cliffs Natural Resources. Highly integrated steel producers of course face less risk. Buying organizations will want to monitor quarterly prices closely for clues on steel price trends.

MetalMiner will be hosting a free one hour Q2 Steel Market Update Webinar. Details of that event can be found here.

–Lisa Reisman

Leave a Reply

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

Scroll to Top