Surge in Iron Ore Spot Market Dogs 2008 Price Negotiations

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Researched by Industrial Info Resources (Sugar Land, Texas)--The formal round of iron ore price negotiations for 2008 is set to begin in the second week of October between China’s Baosteel (Shanghai), BHP Billiton (NYSE:BHP) (Melbourne, Australia), Rio Tinto (NYSE:RTP) (London) and Companhia Vale do Rio Doce (NYSE:RIO) (CVRD) (Rio de Janeiro, Brazil). The scenario building up to these discussions has had a familiar pattern this year but with some variations. In the past few weeks, the Australian producers have been very upfront about their ideas on the upward pressure on prices, whereas last year, both sides drew breath and consolidated their supply chains. The hope that Chinese demand for iron ore — to feed soaring steel production — was going to level off has become a myth for yet another year. With Chinese GDP growth forecast to be between 10.5% and 11% in 2008, iron ore for the steel industry and manufacturing is a basic building block of China’s growth.

The freight charge differential between ore from Australia, Brazil and India has become an issue in the buildup to negotiations with some industry observers feeling that the eventual price rise could be as much as 50% with the majority tipping in the range of 30% or more.

BHP Marketing President Tom Schutte has said that his company would not walk away from any current contracts, given its reputation as a reliable supplier. Currently, Chinese companies are paying almost double for landed Indian ore on the spot market compared with the $78.20 landed price for Australian benchmark-priced ore. Brazilian iron ore is also pricier with a $70 a ton shipping cost compared to the $27.50 a tons it cost to freight the ore form Australia to China.

Although iron ore miners are ramping up their production targets to keep pace with demand, Chinese steel makers, with more than 33% of the world’s production, are increasing output at 15% per annum. Even with expansion plans such as BHP’s project to expand ore production at Pilbara by 300% to 300 million tons per annum, supply cannot keep up with demand. Total shipping/landed costs for iron ore have risen to as much as $165 a ton. For more details, see related September 7, 2007, article - Major Iron Ore Price for 2008 and Miner-Client Convergence in Australia.

In the face of a market with two pricing steams, the spot and the contracted, Schutte is reported to have said that BHP will look at market developments over the coming year and could allocate a percentage of expansion tonnages toward the spot market if a freight differential mechanism that reflects true supply and demand fundamentals is not found between the parties.

Meanwhile, the mining companies are looking at record profits with Citigroup reporting that CVRD could double its earnings from iron ore by 2009.

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