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," - the 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 tons 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"," - Mr. Christmas said. "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, the 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 BADI, 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.
Hyundai Steel, South Korea"s second-biggest steel maker, said on Wednesday that domestic long steel market conditions have improved but have yet to bottom out as construction activity remained subdued.
Hyundai"s profitability has improved steadily after being near break even in January, as it has increased production and prices also slightly recovered, its Senior Vice President said. "Being a dominant player in the domestic construction steel sector, we"ve been badly hit by the current downturn, but demand is improving and inventory is also back to an appropriate level but it"s too early to say if the market has bottomed out," said Kim Sang-gyu, Management Planning Division Director. "Looking back, December was the worst and we didn"t make profit in January but the trend is improving, with production rates recovering to around 80 %."
Hyundai, South Korea"s biggest maker of construction steel, such as rebar, H-beam and section, cut prices by around 20 % between November and December, and reduced output by 250,000 tons in December due to faltering consumption. The cut decreased steadily to 200,000 tons in January and to 50,000 tons in February, and the March output reduction would be kept at 50,000 level, though operation rates could fall again depending on market conditions.
South Korea"s construction sector has been heavily hit by the slowing economy, with building permits awarded in January plunging 48 % in terms of space to 4.49 million square meters.
"We cautiously hope things will improve as the government is boosting infrastructure spending and related orders are increasing, although the numbers are very small. We expect a better second quarter," Mr. Kim said.
The mini-mill operator is investing 5.8 trillion won ($3.9 billion) to boost output capacity by 70 %, or 8 million tons, to 19 million to diversify away from construction steel product and challenge bigger rival POSCO. The two projects, with annual capacity of 4 million tons each, will allow the group, also a member of South Korea"s biggest auto group Hyundai Motor, to supply high-value added products, such as auto sheets and heavy plates, to its affiliates, Hyundai and Kia Motors).
Mr. Kim said Hyundai was not considering delaying the launch of its first blast furnace, scheduled for early 2010, even if market conditions deteriorated further. "Ship plate markets are still in an undersupply condition and we"ll go ahead with the plan to raise operation rates to the full capacity by the second quarter, which will allow us to produce 3.5 million tons of crude steel from the new furnace."
Hyundai, which secured long-term iron ore supply deals with big miners such as BHP and Rio Tinto for its new blast furnace work, expects Asian miners would win a price cut of 50 % in Brazilian iron ore, which would push prices back to 2005 levels of $43 a ton. "Miners would have to accept this as demand weakens sharply from steelmakers and they also have to keep operation rates at a certain level to keep production costs down," Mr. Kim said. He also expected global prices of steel scrap, a feedstock used to make steel from mini mills, would come under further pressure due to lower global steel production.