Steel mills are set to pay record prices for iron ore next quarter, as resurgent global demand butts up against limited supply.
The cost of iron ore, used to make steel, is critical to the global economy as it filters into steel prices and, ultimately, into the cost of everyday goods. The sharp rise in costs – up about 23-25 per cent from the first quarter, according to analyst estimates – will add to concerns about inflation as oil and food prices are also rising rapidly.
Iron ore prices are important to the profitability of two of the world’s largest heavy industries, the mining and steelmaking sectors. In the past three weeks, the three top miners of the commodity, BHP Billiton, Vale and Rio Tinto, have each reported record profits for 2010 driven in large part by the strength of iron ore prices.
Analysts and industry executives expect prices for 2011 to be much higher than for 2010.
Contract prices for the second quarter, which are based on the average spot market price from December to February, are set to rise to about $170 a tonne for Australian iron ore, excluding freight costs. That is 40-45 per cent higher than the same quarter in 2010 and nearly triple the $61 price in place until March 2010 under the old annual benchmark pricing system.
“The year as a whole is going to be phenomenal for the miners,” said Colin Hamilton, bulk commodities analyst at Macquarie.
The price rises have been driven by a strong rebound in global steel production, led by China, which imported a record 69m tonnes of iron ore last month. At the same time, supply has been sluggish, as exports from India have dropped sharply amid higher domestic consumption and export limits.
Guilherme Cavalcanti, chief financial officer of Vale, said on Friday he expected the market tightness to continue for three to four years. “This is the greatest moment for the company so far but the best is yet to come.”
The increase in the quarterly contract price will either push up steel prices or dent steelmakers’ profit margins. Some grades of steel on the spot market have already risen more than 50 per cent since mid-November.
The final contract price, to be calculated today on the last trading day of February, will differ between miners due to the use of different formulas. Vale’s and Rio Tinto’s quarterly contracts are based on a three-month average of spot quotations for the period ending one month before the new quarter. BHP Billiton uses other systems, including one- and two-month averages.
Contract prices for coking coal, the other key steelmaking ingredient, are also expected to settle at or near the record contract price of $300 a tonne, after floods in Australia severely reduced supplies. BHP Billiton is pushing for coking coal contracts, currently settled in quarterly negotiations, to move to monthly deals, although steelmakers are resisting the move.