IRON ORE NEGOTIATIONS ON A KNIFE EDGE

From our friends at MEPS …

The forthcoming annual iron ore price negotiations promise to be the toughest for a long time. Steel executives say they will resist any attempt to raise them for 2006, and some state they will be seeking decreases of 10 percent or so. The miners, however, are anxious to consolidate prices at the new level they reached after this year’s quantum leap. They may well seek a further increase.

What cards are the steel industry holding that can outplay the mines’ strong hand? There is talk of weakness in steel markets, reducing the industry’s ability to pay higher prices for raw materials. The mills will no doubt also point out that extra demand is mainly required by Chinese mills.

Steel industry executives fear that consolidation has given the iron ore suppliers too much pricing power. When the top three companies have a market share of close to 75 percent, it is easy to hold the line against a fragmented buying side.

Market fundamentals support the miners’ case. Demand for iron ore is running at record levels. World pig iron production in the first three quarters of this year was almost 50 million tonnes, or 9.2 percent, higher than the same period of 2004. Production of direct reduced iron was up by 10 percent.

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