Spot iron ore prices hit a fresh 18-month high on Thursday as Chinese steelmakers returned to the market after their new year holidays, buying heavily to replenish inventories.
The sustained surge in spot iron ore costs points to a record rise in the annual price contracts being negotiated between global miners Vale, Rio Tinto and BHP Billiton and steelmakers in China, Japan and Europe.
Australian benchmark iron ore – 62 per cent iron content – surged on Thursday to $133.1 a tonne, according to swaps cleared at the Singapore Exchange.
Spot prices include the cost of shipping to China. Excluding freight costs from Australia to China of about $10 a tonne, current spot prices are more than double the $60-a-tonne level at which the annual contracts were settled in 2009.
This strength bodes well for the miners as they seek record prices for the 2010-11 contracts that start on April 1.
The miners, led by BHP Billiton and Vale, have indicated that they want to shift the annual contract prices closer to the spot market, a move opposed by the steel industry.
Several mining executives told the Financial Times this month that the increase in annual contracts this year could range between 70 and 90 per cent.
Eiji Hayashida, executive vice-president at JFE Steel of Japan, the world’s sixth-biggest steelmaker, this week rejected the proposals to move annual contracts closer spot prices.
He said: “Bumpy, wild swings in iron ore and coal prices are not favourable.”
Spot prices have surged 126.5 per cent over the past 12 months as Beijing ramped up its buying of international iron ore supplies to offset a drop in domestic production.
Spot prices have risen amid market speculation that New Delhi could increase India’s export tax on iron ore after imposing a 5 per cent royaltyin late 2009. India is the world’s largest exporter of iron ore after Australia and Brazil.
As iron ore costs contribute to steel prices and the cost of many consumer goods ranging from cars to washing machines, the contract negotiations are vitally important for the global economy. Acrimonious talks are ongoing, say industry executives.
Crude oil prices fell nearly $2 a barrel as risk appetite weakened amid fresh concerns over Greece’s fiscal problems.
Nymex April West Texas Intermediate dropped $1.83 to $78.17 a barrel, while ICE April Brent lost $1.80 to $76.29 a barrel.
Copper lost 1.7 per cent to $7,030 a tonne. Analysts at Desjardins Securities said that real demand for copper in China was growing faster than consensus expectations.
Desjardins highlighted an acceleration in China’s production of copper semi- fabricated goods and noted that copper prices in Shanghai had remained above the benchmark London Metal Exchange prices since December.
Gold traded in a narrow range just shy of the $1,100 mark, fractionally higher at $1,098 a troy ounce.
Bradley George and Daniel Sacks, co-portfolio managers of the Investec Global Gold Fund, said the positives for gold combined with demand from wealthier investors should push prices to a peak close to $1,300 an ounce over the next six months.