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04 / 03 / 10 in
China iron ore price hike report seen as "posturing"
A Chinese media report that global miners are offering Chinese steel mills a 50 percent rise in iron ore prices was dismissed as posturing by analysts, who predicted a rise of 65 to 70 percent 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 percent 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 (VALE5.SA), Rio Tinto (RIO.AX) and BHP Billiton (BHP.AX) -- were seeking a 50 percent 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 percent looked low, considering soaring spot prices, which have risen more than 50 percent since September, and recent comments from mining companies about the gulf between the benchmark and the market.
"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 percent rise in ore prices.
"Steel mills are getting ready for increased raw material costs. Japanese mills are talking about a 30 percent rise in hot-rolled coil, equivalent to an additional $180 a tonne. But to cover a 70 percent rise in ore and a 72 percent rise in coking coal would only take a 19 percent increase in HRC prices."
Spot iron ore on a landed China basis is trading around $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 $62 a tonne and coking coal was $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 percent 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 percent 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."
IRON GIANT
The China Daily said China's crude steel output was expected to rise 8.6 percent to 621.5 million tonnes in 2010, a slower rate of annual growth than last year's 13.5 percent, without citing a source for the forecast.
That would imply a rise in annual production of 54 million tonnes, compared to 68 million tonnes last year.
Shipments of iron ore dropped in January but are expected to rebound to a monthly record of more than 60 million tonnes in March, the China Securities Journal reported, citing industry analysts.
"The physical market is being driven by Chinese demand, supported by a continuing recovery in steelmaking across the developed economies," said managing consultant David Tucker at Hatch Beddows.
"Combined with falling freight rates this has resulted in a period of sustained price premiums between the Chinese spot market and the equivalent Brazilian and Australian FOB prices."
The firm has lifted its projected outcome for a price settlement to a 65 percent rise from 33 percent in January.
"At the end of last week we calculated the benchmark to spot premiums as 86 percent and 115 percent for Brazil and Australia respectively. In early December the Brazilian FOB benchmark was still at parity with the CFR China spot market and this tempered our January forecast."
With all three big miners likely to be comfortable accepting spot prices for their products, there may not be a settlement at all, Tucker added.
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