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Mittal says rise in ore price will cause steel ‘volatility’

April 30, 2010

‘Laksmi Mittal warned yesterday that the impending large rise in the cost of iron ore would lead to “new volatility” in the steel industry by pushing up prices of the metal – a development, he said, that could harm the competitiveness of some ArcelorMittal European plants.’

Source: Financial Times – April 30 2010

Observations:

  • The benchmark system for iron ore pricing is being replaced by a more flexible quarterly pricing mechanism linked to the spot market. The reduced certainty on iron ore purchase prices for steel makers will cause similar uncertainty in the price of their output.
  • Steel makers are looking for various ways to reduce the new risk they are encountering. The most important will be to pass price increase on to customers, increasing steel prices globally.

Implications:

  • Reduced certainty on price of iron ore will impact investment decisions for both iron ore miners and steel makers, forcing them to adjust the time value of money in project valuation.
  • Steel makers will increasingly opt for vertical integration, trying to secure a stable raw material base.
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