Rising Iron Ore Prices for China will effect Steel Prices

One of the issues bubbling while I wasn’t blogging was the iron ore price increase that Chinese steelmakers had to accept recently. There are many articles about it, many opinions, all contradictory (of course).

Let’s start here:
China’s steel mills shrug off iron ore rise. An amazing feat, if true. I don’t know too many industries that can shrug off an 85% increase in a major input cost.

Big steelmakers in China on Tuesday shrugged off the impact of Monday’s record rise in iron ore prices, but the higher prices could increase cost pressures on smaller mills and hasten consolidation in the industry.

The average 85 per cent price increase agreed with Rio Tinto, the Anglo-Australian miner, was within the range of expectations, analysts said. Chinese mills had been expecting a price rise of at least 65 per cent[…]

“They [large and medium-sized steelmakers] can still maintain a long-term pricing system with the Australian miners,” and avoid higher-priced spot market purchases, Ms Wang said.

But analysts said thousands of smaller Chinese mills could be affected if the pricing agreement leads to higher spot prices, hastening consolidation in the steel industry. Smaller mills buy iron ore on the spot market and are unable to lock in prices by annual contract.

If this leads to consolidation of the chinese steel industry, this should lead to higher prices for chinese goods made of steel. The article says a 3% rise in output prices should cover it.

The consolidation effect was predicted already as far back as February, in the China Daily. Iron ore price rise could force China steel rationalization

China imports almost half of the world’s seaborne iron ore, making it the largest iron ore consumer in the world, but it has become a price-taker for this basic input for steel — perhaps because it waited too long to negotiate with major suppliers.

I also blogged on it at the time.

At the end of June, chinastakes.com wrote Iron Ore Price Hike to Swallow Chinese Steel Producers’ Profit

Apart from the iron ore price hike, the coking coal price rise will also lift the production cost of domestic steel producers. […] With steel companies facing increasingly high production cost, profits are expected to slide in the near future.

Apart from the iron ore price hike, the price of coal and coking coal, as well as transportation costs are also increasing. In December of 2007, the average production cost of steel and pig iron in large and medium-sized steel companies increased by 31.05% over the same period in 2006.

The production cost increase of steel companies, a large part of it a result of the rise in iron ore and coking coal prices, will have a profound influence on the shipbuilding industry, the construction machinery industry, and the household appliances industry.

None of those are directly customers for small and medium sized stamping outfits, but each of those industries utilize loads of smaller stamped metal parts. Where the major manufacturing goes, so goes the little guys.

At the end of June, Mineweb.com said that Chinese dependence on iron ore imports has been growing, and was likely to rise in future.

while China was the world’s biggest producer of iron ore at 520mt in 2006, representing almost a third of global production, much of this material is very low grade.

China will become more dependent on imported iron ore in future, despite the fact that its own production of iron ore has been increasing rapidly since the start of the century. Monthly imports have been growing at a much faster pace and are now almost double its own production.

Today, several sources, including Steel on the Net announced that Sinosteel succeeded in its bid to gain control of Australian iron ore miner Midwest. Stock exchange documents show it now has a majority stake in the target company. http://en.ce.cn/Business/Enterprise/200807/12/t20080712_16135812.shtml

See also: Forbes Sinosteel buys controlling stake in Aussie miner