Plummeting steel prices and a glut of iron ore as demand wanes will give steelmakers the upper hand in often bitter and lengthy price negotiations to set the annual benchmark price for iron ore.
But with spot prices still within sight of the benchmark price and freight rates having collapsed since last year iron miners could fight back to limit a price fall.
Steel prices have tumbled more than 50% since mid-2008, and steelmakers have slashed production sharply in the face of one of the sharpest economic downturns in decades.
“Inevitably, the balance of power has shifted more toward the buying side, given the global outlook,” analyst David Tucker at steel industry consultancy Hatch Beddows said.
Almost all analysts spoken to expect the outcome will be a price fall in the often bitter and lengthy annual price negotiations, which take place between the world's top miners BHP Billiton, Rio Tinto and Brazil's Vale and steelmakers.
“Since steel prices have come down 50%, iron ore prices should come down 50%, that's my gut feeling,” said Ian Christmas, director general at the World Steel Association, whose members represent 85% of the world's total output.
Australian iron ore miners BHP Billiton and Rio Tinto have achieved a nearly doubling of prices in 2008 negotiations when demand for steel was booming.
Together with Brazil's Vale, the trio control about three quarters of the 800 million ton annual market in seaborne iron ore.
“The argument of iron ore companies, when they have pushed the prices up, was, 'Hey Guys, you can pass these prices on, the market's good, you're not suffering',” Christmas told the Reuters Global Mining and Steel Summit in London.
“You can't turn around and say, Well, even though your customers are not prepared to pay anything, you still have to pay these high prices.”
A Reuters survey at the end of January showed that Australian iron ore prices are expected to fall 30% in 2009 talks, after six years of consecutive price hikes for the key steelmaking raw material.
But some factors are still in the miners' favor, and Jim Cochrane, head of business development at Eurasian Natural Resources Corp (ENRC) expects a “slight decrease” in price rather than a big one.
“The price is on an FOB basis and since freight prices have come down, steelmakers do not have to pay a high price for freight any more,” he said. The Baltic Exchange's main sea freight index, which tracks rates to ship dry commodities, hit a record high in May last year, before plunging more than 90% to around 660 in December. The index has risen to around 2,298 since then.
Iron ore shipping costs were a major source of conflict in 2008 talks, when Australian miners won hefty price hikes on the basis of more expensive shipping costs from Australia to China compared with Brazil to China.
“Plus, spot prices are not that far off from the benchmark price,” Cochrane said.
Spot prices in China climbed as much as 30% between December and late January to above $80 a ton, which the miners see as signs of a recovery and ground for a rise, or at least a rollover, in this year's benchmark price.
But the rise, triggered by an increase in China's steel production, was short-lived and prices have fallen around 12% to $70 a ton in the past two weeks.
“China's stockpiles are on the way up and there are clear indications that there's been an overshot in steel production,” DJ Carmichael & Co mining analyst James Wilson said.
“Steel makers there fired up in December and January because they thought the stimulus package was going to be all conquering and of course that hasn't been the case, so iron prices are coming down,” Wilson said.
But imports keep rising.
China, the world's biggest user of iron ore, imported a record tonnage in February, and the country's steel industry body warned steelmakers were blindly rushing back to full production when demand is still weak.
“Demand has not yet recovered and there has been no apparent effect from government policies aimed at boosting domestic consumption, but the extra crude steel output from the mills is incredible,” CISA's honorary chairman, Wu Xichun, told an internal meeting of the body in late February. (Reuters)