IRON ORE PRICE RISES OF NEAR 20 PERCENT PREDICTED NEXT YEAR

Any settlements reached for the 2010 iron ore contracts are likely to be at a figure approaching 20 percent above the level agreed by many Asian and European steel mills in 2009. There are several factors which lead us to this conclusion.

First, the mining companies will wish to claw back a large slice of the price concessions made for the existing contracts because this year’s demand has been much higher than anticipated at the time of the negotiations.

Second, spot iron ore prices are, currently, above the 2009 contract prices.

Third, MEPS estimate that world iron production in 2010 will be above the previous record figure in 2007.

In early 2009, several major institutions were forecasting a reduction steel demand of between 12 and 15 percent year on year. MEPS estimates that the decrease will be nearer 8.5 percent. More importantly, steelmaking via the integrated ironmaking routes will take a larger share of supply. In fact, global iron production in 2009 from the blastfurnace and DRI processes will be only 5 percent lower than in the previous twelve months. Real demand for iron ore has clearly been substantially greater than originally anticipated by the negotiators on both sides. Furthermore, it is reported that the Chinese mills have substantially raised their stocks of imported ore during the past six months.

The increased consumption has pushed up the spot price of iron ore to above the contract price. This is particularly important for Eastern steel companies. The European, Japanese and Korean mills agreed contract prices with most suppliers for 2009. There are suggestions that the mining companies would like to move to spot iron ore prices for all sales. The mills may have to concede large increases this year to maintain the contract price system.

MEPS estimates the 2010 global steel output will be an all time high figure – at just above the 2007 peak volume. Total iron production is likely to be 3.5 percent above the previous record outturn.

The combination of the mining companies wishing to retrieve potential lost revenue from the 2009 contracts, iron ore spot prices above contract prices and record demand in 2010, is likely to lead to tough talking in the new negotiations which start in December. The mining companies will have a good case to put to the Chinese who have led the increase in demand throughout the past twelve months. An iron ore price rise of more than 15 percent is highly likely. Prospects of agreement near to 20 percent are a distinct possibility.

See: MEPS World Steel Outlook Q4-2009.

Source: MEPS - World Steel Outlook