Annual price negotiations for iron ore are set to be even tougher this year as steel makers, facing a global slowdown in demand, are looking to reverse some of the past six years of continuous price increases for their inputs.
Contractual iron ore prices, which take effect for a year from April 1, are influenced by settlements between the Asian steel makers and the world’s biggest iron ore producers: Rio Tinto, BHP Billiton and Companhia Vale do Rio Doce (Vale).
South Africa was the world’s seventh-largest producer of iron ore in 2007, according to Chamber of Mines figures.
Kumba Iron Ore and Assmang follow the same price trends as the major global producers, although they negotiate separately with their customers.
Kumba Iron Ore spokesman Tebello Chabana said yesterday Kumba had not yet started its annual contract negotiations and said that as a matter of policy the company does not comment on the outlook for prices ahead of negotiations.
Bloomberg reported that Fitch Ratings has said in a research note this week that annual contract iron ore prices were likely to fall by 20%-40% this year and steel demand would not recover until the second half of the year.
A similar prediction was made in a report from investment house Macquarie in the middle of last month, predicting iron ore contract prices would fall about 20% this year compared with last year.
London-based investment house Fairfax said in its morning note to clients that steel prices could start to recover in the next few months, boosted by governments’ economic stimulus packages and cutbacks in production, after halving since July. Fairfax said indicative iron ore spot prices had risen 24% from a three-year low on October 31.
Fitch and Macquarie’s price predictions contrast with recent comments by Chinese steel makers, attributed partly to preliminary negotiating tactics, that iron ore prices should be cut by up to 82% this year.
Last year, the benchmark price increase was 65%, agreed in February between Vale and Asian steel makers Nippon Steel, JFE Holdings and Posco. Some producers received higher prices, depending on the quality of their product.
Macquarie’s analysts suggested that the amount of iron ore delivered on contract would shrink this year, with more sales on the spot market, where prices have recently been higher.
This is a trend that Rio Tinto has been pushing. West Australia News Online reported that Rio Tinto iron ore CE Sam Walsh told an Australian Institute of Company Directors lunch in late September that Rio Tinto was not planning to increase its traditional long-term contractual business which were “just not representing market value,” he said.
“We’re not going to let go in terms of the difference between what India is being paid for their spot shipments versus what we’re being paid for ours — we just simply don’t believe that’s fair or equitable.”
In the same report, Gindalbie Metals chairman George Jones said strong demand for iron ore would continue until about 2013 to 2015, driven by urbanisation in China.
Source: Business Day
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