Just when many analysts thought iron ore prices couldn’t go much higher there’s news of another round of big price rises in the offing.
In fact the huge surge in profits seen in the last half of 2010 will be repeated this half, and especially the June quarter with prices up 40% or more above a year earlier.
BHP Billiton, Rio Tinto and other iron ore exporters are looking for a surprise 20% rise in quarterly contract prices for the three months starting April 1.
The increase is expected to be ratified in the next few days between the companies and steel mills in Asia and Europe.
And a move by India in its national budget on Monday to treble its iron ore export duties will add more upward pressure on prices in coming quarters.
The latest price rise will push steel prices even higher (adding to the inflationary pressures across the world). Some steel industry prices have risen 50% for some types of product since November; such has been the pressure on steelmakers.
And they will feed into higher prices for the third quarter, if there’s no reduction in spot prices in the next three months.
The new increases will take global iron ore prices to around $US175 a tonne for 62% iron content ore from Western Australia, landed in China (with freight included).
(These are contract prices, not to be confused with spot prices which have been floating in the range of $US183 to $US195 a tonne, including freight, for much of the last month.)
The quarterly contract prices for the second quarter (based on the average spot market price from December to February) will be priced above $US170 a tonne for Australian iron ore, excluding freight costs. The prices are set on the last day of February which was yesterday.
That’s up to 45% more than the June quarter of 2010, and nearly triple the $US61 price in place until March 2010 under the old annual benchmark pricing system (which has been cut from around $US100 a tonne in 2008).
But with Rio, BHP, Vale of Brazil, plus smaller rivals like Fortescue Metals, all reporting record earnings off the back of the iron ore price boom (and the surge in coal, copper, gold, silver and nickel prices as well), the forecast means that the industry will see even higher profits this half from this sector than they did in the six months to December in the case of BHP, or the 12 months for Rio and Vale.
The price rise will be much bigger than many analysts had been looking for a month ago and follows production and exporting hitches in Brazil and Australia because of bad weather and continuing shortfalls in the amounts of Indian iron ore reaching the market.
Vale, the biggest exporter of all, is looking for a price rise of around 20% next quarter, according to its sales boss.
The company said last week in its 2010 annual report that, "Since mid-July 2010 iron ore prices in the spot market have been increasing, reaching almost US$ 200 per metric ton, thus surpassing the peak level of the post-crisis period, at US$ 186 in April last year.
"Rising prices are reflecting a combination of a strong Chinese-led global demand and a tight supply."
It pointed out that Indian iron ore exports fell 11% in 2010 and its market share in China has fallen from a quarter to around 15% in the space of several years.
Vale and other companies point out that the floods in Queensland, Colombia, Indonesia and South Africa which have also boosted the spot price of coking coal (in all its forms, hard, soft, PCI) is boosting demand for higher quality iron ore so the steel mills can get the highest possible yield from increasingly expensive resources.
And world steel output is recovering after a dip in the middle of 2010. A record 1.47 billion tonnes of crude steel was produced around the world in 2010, with Chinese production up again.
That improvement continued in January, according to the World Steel Association with global crude steel production rising to its highest level since May 2010 in January 2011.
World crude steel production rose 5.3% to 119 million metric tons in January compared with January 2010, according to the report from the World Steel Association.
The US produced 6.8 million metric tons (6.8 million tonnes) of crude steel in January 2011, an increase of 9.4%.
In Asia, China’s crude steel production was 52.8 million metric tons, up 0.5%. Japan produced 9.7 million metric tons of crude steel in January, an increase of 10.7%. South Korea’s production rose 24.2% to 6 million metric tons.
In Europe, Germany’s crude steel production for January 2011 was 3.7 million metric tons, an increase of 4.4%.
Italy’s crude steel production rose 10.3% to 2.1 million metric tons. Spain produced 1.4 million metric tons of crude steel in January, up 4.1%.
Brazilian crude steel production was 2.8 million tonnes, 3.8% higher than a year ago.
The report said the world crude steel capacity utilization ratio rose 2.3 percentage points to 75.6% from December 2010.
That was 0.4 percentage points lower than the year-earlier month, but higher than it was in the closing months of 2010.
