Steel Prices Set to Soar After Iron Ore Deal

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

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[BLT-LN  Loading...      ()] 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.

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

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[MT  Loading...      ()   ] and Thyssenkrupp, warned that the increase in iron ore costs will “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. On Tuesday the spot price for Australian iron ore hit a fresh 18-month high of $153.6 a tonne.

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.