Something strange happened when news broke in
Asia of a benchmark iron ore price increase of 65 percent.
Shares in regional steelmakers went up as investors, apparently
cheering the biggest rise in iron ore costs since 2005, rushed
The share price increases weren't modest.
Stocks in Nippon Steel Corp., Japan's largest steelmaker with
whom Brazil's Vale concluded the benchmark deal, rose by 3.2
percent, and the holding company of JFE Steel Corp., Japan's
second-biggest steelmaker, enjoyed a 6.3-percent boost, while
Baosteel Group Corp. Ltd., China's top producer, also saw its
shares rise by a good chunk.
Given all the hoo-hah during the negotiation
period about steel mills trying to resist a catastrophic rise
in iron ore prices, why did the market appear to welcome a
The explanation most widely given was that
the increase was actually a lot lower than anticipated. But
looking back at media reports, there were few public
predictions above 70 percent. Maybe it was the relief
factor-that the uncertainty had been lifted and mills could
gear up and plan properly for the increase.
Whatever the reasons, it's a big rise .?.?.
and follows increases of 9.5 percent last year, 19 percent in
2006 and 71.5 percent in 2005.
Last year's increase became a sore point for
iron ore miners because spot market prices soared-first to
double and then around triple the benchmark level-so the iron
ore majors were keen to claw back some of that lost ground, as
well as negotiate a settlement that is fairer this year as spot
prices look likely to remain somewhere around the same high
Iron ore suppliers are happy for now, but in
the long term the Australians-BHP Billiton and Rio Tinto-are
looking to shift away from the tendentious annual negotiations.
Rio Tinto is moving some tonnage onto the spot market, while
BHP Billiton wants a transparent index to determine appropriate
But the response from the Chinese steel
industry, which had expected a big rise but vowed publicly
never to accept an increase of that magnitude, has been fairly
muted. The bigger mills responded simply by announcing big
price hikes in order to pass on higher costs to consumers as
promptly as possible. All the signs in the market are that
these price rises are being readily accepted.
The Chinese steel market is still in robust
shape and the major steelmakers by and large made healthy
profits in 2007, so they are hardly in mortal danger. The
problems come further down the food chain. Many of the
medium-sized mills, and most of the smaller ones, operate with
lower margins, producing lower grades of steel that have been
exported in huge volumes in recent years.
With a global economic slowdown looming and
the Chinese central government cracking down on exports, the
overseas market won't be like 2007 again. The smaller mills are
much more exposed than the likes of Baosteel or Jiangsu Shagang
Group to major raw material cost increases, and are much more
reliant on a volatile spot market.
At the end of last year, many smaller mills
were put out of action because they could no longer afford iron
ore at prices close to $200 a tonne. That pressure might
continue this year, with the increase in benchmark costs
already spurring Indian suppliers to the spot market to raise
their offers again. At the same time, many of the smaller,
often highly polluting mills are being chased by China's
authorities, who want a more disciplined and consolidated steel
China's National Development and Reform
Commission is already getting tough, ordering inspections as
well as punitive action against local authorities that fail to
follow closure orders. Progress in this regard was relatively
weak last year, but market forces and government pressure might
conspire to bring greater pressure this year.
The irony of the 65-percent rise in iron ore
costs is that it could end up achieving exactly what the
Chinese are looking for greater consolidation of the domestic
market, which in turn will benefit the bigger mills.
Maybe this is the reason why China's steel
lobby was surprisingly quiet in the aftermath of the iron ore
deal, and maybe it's part of the reason why, at least in China,
steel companies' shares reacted warmly to the higher