The 65-71% increase in the prices of iron ore in 2008 contracts has not come as any surprise to the steel industry. The very fact that the Indian origin fines were selling at over $130 per tonne, the prices set in the contracts at about $52 per tonne earlier for 2007 supplies, were far too on the lower side, and realistically speaking one would have expected a larger increase. Perhaps both Rio Tinto and BHP Billiton are waiting to pocket the freight advantage they have over Vale in their supplies to China, Korea, and Japan, and build the same on to the base price. But, they may not go the full length, considering the sensitivities of the day involving the proposal of BHPB to buy out Rio.
Every contract price increase tries to capture the spot premium and at the same time, invariably, sets a new benchmark for the spot prices to rise in response. It is not so clear at this stage whether this will happen this year too, and if so, by how much. Much depends on the criticality of sourcing iron ore and especially the same for Chinese steel makers.
Iron ore demand was ahead of supplies toward the end of last year, due to a variety of problems such as infrastructure, manpower, and equipment shortages. While the situation is unlikely to be different this year, the demand growth may not be as strong as a result of a slowdown in steel production growth rates. Therefore, one does not expect an explosive situation of any kind that many experts have been predicting.
The current prices of steel are good enough to absorb any increases in cost on account of raw materials such as iron ore coking coal, manganese ores, etc. The prices of flat steel products are shooting up again on the global market, especially in view of the forecast of doubling of coking coal prices in 2008 contracts. The spot prices of the product are currently more than thrice the 2007 contracts. The situation is fairly complex and alarming. The response to this situation can be chaotic, illogical, and in most cases speculative.
While in India, there are demands ranging from raising import duty on steel to a ban on exports of iron ore, in Taiwan, the government is thinking about putting a ban on exports of long products and billets. In China, there are restrictions on the export of steel without having a clear plan on what to do with the huge export volumes they are maintaining at the moment. Fundamentally, very little efforts have been made to understand the commodities market, especially the current conditions of the same, and there are too many diverse interests at play. Known to all, accepted by none.
If the global economic growth rate is to be sustained at the current level and steel-based construction is to be accelerated, one has to be prepared to pay more for steel. Also, the steel makers need to prepare themselves for higher iron ore price. If alumina accounts for over 40% of the production cost of aluminium, the iron ore situation is not going to be very significantly different. Economics of the steel industry are going to be changed drastically. Good or bad, one has to accept this and respond to it intelligently.
Let the market rule and let there be a market driven price for all – steel, iron ore, coking coal, iron ore mines, coal mines, etc. If this is ensured, the market will ensure supplies of iron ore to steel mills. A market driven price for it will lead to a realistic market price for steel too.
?The author is strategy consultant: Steel, Minerals, and Coal