Early Agreement Between CVRD and Baosteel on 2007 Iron Ore 9.5% Price Rise

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Researched by Industrial Info Resources (Sugar Land, Texas). On the evening of the last Thursday in December, Shanghai’s Baosteel Group (Shanghai, China) reached agreement with CVRD (NYSE:RIO) (Rio de Janeiro, Brazil) on the supply contract price for iron ore in 2007. The 9.5% increase represents a price of $72.11 per ton. The 2007 price rise follows previous increases of 71% in 2005 and 19% in 2006.

Haggling over the price was expected to go on well into the New Year, based on annual precedents, but the speed and relative calm around the proceedings reflects new alignments both in domestic consumption of iron in China and India and the rationalization of the steel industry globally. As ore suppliers and steelmakers look for more medium-term stability in the structure of the sector, the continued forward rush of the Chinese economy plus the fact that India will be using more of its ore for domestic steel production balanced out with the final price at the upper end of predictions. In November, Industrial Info came out with an expected industry consensus figure of an 8% price rise, whereas Baosteel was looking for as close to zero as possible. See related news item Friday, November 17, 2006 – 2007 Iron Ore Price Consensus at 8% - China Looks for Drop in Balanced Market.

The new agreement sets the mark for the other major ore producers BHP Billiton Rio Tinto. CVRD, BHP and Rio Tinto control 70% of the seaborne iron ore market. It also sets the mark for other major steelmakers such as Korea’s Posco and Japan’s Nippon Steel who have agreed to a joint bargaining partnership regarding the ore price.

Prior to the price announcement the China Iron & Steel Association released an estimate of iron ore imports for the country in 2007 of 354 million tons representing an 11% increase on 2006. Although China’s domestic ore production will rise from 644 million tons in 2006 to 772 million tons in 2007, it averages only 18% to 20% iron content compared to the Brazilian ore’s 60% plus iron content. CVRD is targeting iron ore production of 300 million tons in 2007 after reaching an estimated figure of 266 million tons in 2006. For related news item see December 22, 2006 – China’s 500 Million Steel Output in 2007 Creates Market Anxiety.

Industrial Info Resources (IIR) is a Marketing Information Service company that has been doing business for over 23 years. IIR is respected as the leader in providing comprehensive market intelligence pertaining to the industrial processing, heavy manufacturing, and energy-related industries throughout the world.