By Javier Blas in London and Peter Smith in Sydney
Published: March 30 2010 05:57 Last updated: March 30 2010 20:03
Global steel prices are set to leap by up to a third, pushing up the cost of everyday goods from cars to domestic appliances, after miners and steelmakers on Tuesday agreed a ground-breaking change in the iron ore price system.
The deal by Vale of Brazil and Anglo-Australian BHP Billiton with Japanese and Chinese mills marks the end of the 40-year-old benchmark system of annual contracts and lengthy price negotiations. The industry instead agreed to move to quarterly contracts linked to the nascent iron ore spot market.
“The benchmark system has ended. There is no comeback,” said a senior mining executive directly involved in the talks.
The world’s top ore miners stand to profit hugely in the short term from the new price system. One executive estimated that the profits of the big three producers, Vale, Rio Tinto and BHP Billiton, would be boosted by at least $5bn this year.
The new system is a response to last year’s stalemate in the negotiations between miners and Chinese steelmakers, when both sides were unable to reach an agreement on annual prices. The balance of pricing power has shifted in the miners’ favour due to the emergence of China as a voracious consumer over the past 10 years.
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Brendan Harris, a mining analyst at Macquarie in Sydney, said the shift was a “momentous” day. “It’s not every day that the pricing terms for one of the core commodities in world trade change,” he said. Steel accounts for 95 per cent of the world’s metal consumption and iron ore is the main ingredient in steelmaking.
The new price system will lift the cost of iron ore to Asian steelmakers to about $110-$120 a tonne during the April-June period, up between 80 and 100 per cent from the $60 level at which the 2009-10 annual contracts were settled.
The steelmakers said they would compensate for the increase in raw materials costs by raising steel prices by up to a third. Some companies have already raised their prices in anticipation of the move in iron ore. The cost of the benchmark hot rolled coil steel is likely to hit $725-$750 a tonne by the end of next quarter, up from $550 in January. It traded as low as $380 a tonne last year.
“The impact of higher raw material prices will be passed to consumers,” said Thorsten Zimmermann, a steel analyst at HSBC in London.
Leading Japanese steel mills, including Nippon Steel, and Chinese steelmakers, including Baosteel, had signed the new quarterly contracts, executives said. European steelmakers have yet to sign any new quarterly contracts. Rio Tinto has not announced a contract, but executives expect it to soon.
The European steel industry association, which represents some of the largest companies in the industry such as ArcelorMittal and ThyssenKrupp, warned that the increase in iron ore costs would “inevitably” have a “significant impact on prices through the whole value chain down to the end consumer”.
The new pricing system means that iron ore costs are likely to rise even further over the summer as spot prices continue to climb, analysts said. The spot price for Australian iron ore hit a fresh 18-month high of $153.6 a tonne on Tuesday.
Chris Williamson, chief economist at Markit in London, added that steel demand and supply fundamentals were likely to drive further price increases in coming months. “Inflationary pressures are building in emerging markets,” he said.
Talks to set an annual benchmark price for 2010-11 turned acrimonious last year when China refused to accept prices the miners had agreed with Japanese and European steelmakers and demanded a 45 per cent cut in benchmark iron ore prices.
The dispute threatened to hurt Sino-Australian relations when Stern Hu, Rio’s former top iron ore salesman in China, was arrested in Shanghai. On Monday, Mr Hu, an Australian national, was convicted of bribery and stealing commercial secrets that revealed the position of the China Iron and Steel Association, the lead Chinese negotiator, during the fractious negotiations. Baosteel, which this year is representing China in the talks, this month opened the door to a shake-up of the annual pricing mechanism when it said it would be “reasonable” to change the system.
“I think Chinese mills may well prefer to agree a quarterly price below current spot levels, rather than risk talks breaking down and being forced to pay more on the spot market,” said Rafael Halpin, research analyst of Steel Business Briefing in Shanghai.
South Korea’s Posco, the world’s fourth-largest steelmaker, said on Tuesday its talks with Vale continued. “Major suppliers are asking for quarterly contracts instead of annual ones ... their voice is gaining more weight,” Posco said.
Additional reporting by William MacNamara in London, Robin Harding and Jonathan Soble in Tokyo, Song Jung-a in Seoul and Patti Waldmeir in Shanghai
Copyright The Financial Times Limited 2010.
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