Pressure for More Iron Ore and Steel Price Increases Mounts in Asia

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The China Iron and Steel Association, CISA, has officially given up on its role in the iron ore contract negotiations by saying the steel mills are free to negotiate their own deals on whatever terms they can secure from the major iron ore suppliers. The tone of the announcement though, illustrates the organization’s frustration in not being able to influence events more effectively specifically in the move to quarterly pricing and price fixing based on the previous quarter’s spot prices. The result? A near 100% price increase for the second quarter.  Some commentators have noticed a cooling in spot prices over the last week or so of $5-7 per ton and suggested prices may be due to come off in Q2 signaling lower quarterly contracts in Q3. According to a Reuters report, current spot prices hit more than $180 a ton and flirted with an all-time high above $200 a ton set in February 2008. They point to steady import stocks in China and CISA’s statement that efforts are being made to develop domestic iron ore reserves to supplant imports. Unfortunately, domestic iron ore supplies are generally of lower quality and the cost of production is high at $100/ton compared to Australian material at $30/ton.

Further evidence for a price fall is explained by recent efforts to curb property market speculation expected to impact the construction sector but Credit Suisse in a recent investors report points to the still rising steel production numbers in China to support growing demand and the looming onset of the annual monsoon period in India when exports from the principal port of Goa stop from May through September. If demand remains constant, and CS expects it to continue to rise, combined with Indian iron ore not available for export as it does every year at this time, then the upward pressure on spot iron ore prices will continue.

The bank sees three key bullish Chinese policy/industry signals supporting steel output:

  1. Rising property prices are an encouraging signal to developers to expand production rates regardless of efforts to stop the speculative element
  2. Record property loans first quarter up 31.1% year over year to $123bn for property developments
  3. Record land bank expansions – China’s 2010 National Housing Plan has allocated 180,000 hectares to residential construction verses just 76,461 hectares available in 2009, up 135% year over year. The intention is to reduce price inflation by increasing land supply an acknowledgment building rates are going to continue whatever the authorities do to bank lending rules

On the supply side, ore shipments into China have been falling since Dec ’09, due to the combined effects of various shipping disruptions particularly for Vale and the ongoing recovery outside of China increasing global demand. Credit Suisse estimates Chinese arrivals from key suppliers are off about 6-7mt/month since Dec ’09, exacerbating an increase in demand of about 6-7mt/month, with Chinese domestic iron ore supplies (both post-winter and high cost restarts) struggling to fill the void left by this 12-14mt gap. This largely explains the dramatic 80% surge in spot market prices since the beginning of 2010 and isn’t about to be resolved anytime soon.

All in all the trend for iron ore prices and therefore steel mill costs looks likely to continue to rise in Asia through Q3 2010, putting pressure on mills to raise prices for finished products to consumers.

As a post script an interesting short history of the iron ore contract by Nick Trevethan can be found on MineWeb at this link.

–Stuart Burns

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