The forthcoming
annual iron ore price negotiations promise to be the toughest for a
long time. Steel executives say they will resist any attempt to
raise them for 2006, and some state they will be seeking decreases
of 10 percent or so. The miners, however, are anxious to consolidate
prices at the new level they reached after this year’s quantum
leap. They may well seek a further increase.
What cards are the steel industry holding
that can outplay the mines’ strong hand? There is talk of weakness
in steel markets, reducing the industry’s ability to pay higher
prices for raw materials. The mills will no doubt also point out
that extra demand is mainly required by Chinese mills.
Steel industry executives fear that
consolidation has given the iron ore suppliers too much pricing
power. When the top three companies have a market share of close to
75 percent, it is easy to hold the line against a fragmented buying
side.
Market fundamentals support the miners’
case. Demand for iron ore is running at record levels. World pig
iron production in the first three quarters of this year was almost
50 million tonnes, or 9.2 percent, higher than the same period of
2004. Production of direct reduced iron was up by 10 percent.
There is no sign of China running out of
steam. In the first nine months of 2005, the country imported close
to 200 million tonnes of iron ore, a year-on year increase of over
30 percent. Chinese demand for imported ore could exceed 400 million
tonnes per year by 2010 – double its 2004 level. Global demand for
seaborne iron ore could rise from 596 million tonnes in 2004 to 650
million tonnes this year.
Looking at the supply side, output of iron
ore is also at record highs. Growth production has barely matched
rising demand, with a 10 percent jump in 2004. Mine expansions are
under way, but some are being delayed by shortages of skilled labour
and long lead-times for delivery of mining equipment. Most of the
new capacity is being added by the Big 3 suppliers – tightening
their grip on the market. The miners argue that high prices are
needed to finance the additional capacity. However, mills in the
industrialised countries will balk at funding increased supplies to
China, particularly now that the Chinese market is oversupplied and
contributing to the current steel price weakness around the world.
Strong demand has seen the emergence of a
substantial spot market, mostly for Indian ore exports to China.
Prices in this spot market have been above annual contract prices
– a fact that the miners will no doubt bring to the buyers’
attention.
A few months ago, observers were saying
that, after this year’s increase, iron ore prices had risen to
unsustainably high levels and could fall by 15-20 percent in 2006. A
no change or small rise may be the result.
