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Wassalam.
5/11/2009
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Friday, March 5, 2010

Report of 50% iron ore price hike offer doubted

Thestar: Friday March 5, 2010

Analysts say settlement, if reached, seen nearer 65% to 70%
BEIJING: A Chinese media report that global miners are offering Chinese steel mills a 50% rise in iron ore prices was dismissed as posturing by analysts, who predicted a rise of 65% to 70% instead.
China has by far the world’s largest steel sector, producing almost half of global crude steel last year, when the country’s iron ore imports surged 42% to a record 628 million tonnes to feed the rampant production.
The head of the iron ore department of a large Chinese steel mill told the state-run China Daily that the big three iron ore miners – Vale, Rio Tinto and BHP Billiton – were seeking a 50% hike in term prices from 2009 levels.
BHP and Rio Tinto officials declined to comment on the report as a matter of policy.
However industry analysts said 50% looked low, considering soaring spot prices, which have risen more than 50% since September, and recent comments from mining companies about the gulf between the benchmark and the market.
Inspection workers collecting samples at an iron ore dump site in Shandong province on Monday. Spot iron ore on a landed China basis is trading around US$134 a tonne, double the 2009 free-on-board contract. — Reuters
“I think this is posturing and very much to be expected this time of year. With the big iron ore producers voicing an interest in spot pricing, it will be very tough for the steel mills to fight a big price increase,” said ANZ’s senior commodity analyst Mark Pervan, who forecast a 70% rise in ore prices.
“Steel mills are getting ready for increased raw material costs. Japanese mills are talking about a 30% rise in hot-rolled coil, equivalent to an additional US$180 a tonne. But to cover a 70% rise in ore and a 72% rise in coking coal would only take a 19% increase in HRC prices.”
Spot iron ore on a landed China basis is trading around US$134 a tonne, double the 2009 free-on-board contract.
Iron ore miners, BHP Billiton in particular, have talked at length in recent weeks about the difference between spot and annual prices, hinting that contract prices and the spot market needed to converge.
Last year’s contracted iron ore prices were around US$62 a tonne and coking coal was US$129. Based on 1.6 tonnes of iron and 0.6 tonnes of coking coal to make one tonne of steel, Japanese mills could be positioning product prices for a worst-case scenario of a 100% rise in coke and ore costs.
The China Daily quoted the steelmill official as saying Baosteel, which is leading the talks this year, “would wait and see how Japanese and South Korean steel mills react to the proposal before taking a decision”.
“If other Asian steel mills accept the new ore prices, then Chinese steel mills will have no other choice but to accept the same, as stopping production is not in the best interests of the industry.”
A source at South Korea’s top steelmaker POSCO said it had not received any official offers from major iron ore suppliers yet, but added that miners have said, during casual meetings with mills, that prices should return to 2008 levels.
The collapse of financial markets in 2008 prompted a 33% fall in annual iron ore prices settled with Japan and South Korea.
Steep prices may force steelmakers to shift away from decades-old annual benchmark pricing and adopt a hybrid annual or quarterly set pricing model, the POSCO source added.
“Steelmakers will have to use a differential negotiating system – i.e., partly accepting a quarterly index system. While we cannot say officially that we would accept it, there should be a certain momentum to change the system.”
The China Daily said China’s crude steel output was expected to rise 8.6% to 621.5 million tonnes in 2010, a slower rate of annual growth than last year’s 13.5%, without citing a source for the forecast. — Reuters
That would imply a rise in annual production of 54 million tonnes, compared to 68 million tonnes last year.

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