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Steel chief predicts miners will lose advantage

May 17, 2010

“Quarterly iron ore supply contracts that are set to drive up the price of mass-market products such as cars, are not necessarily permanent, a leading steel industry executive has claimed.

Wolfgang Eder, chief executive of Voestalpine, the Austrian steelmaker, told the Financial Times that miners would start to lose the upper hand in contract negotiations in 18 months. ‘I think the situation will not stay as it is regarding the strength of the mines. It’s never that one party is only strong and the other is only weak. ‘For the time being, there’s no doubt that we have to accept quarterly pricing. [But] in the medium and long run I have some doubts,’ the well-respected industry figure and president of Eurofer, the European steelmaking association, said. …

In the meantime, Eurofer has written to the European Commission demanding an investigation into ‘possible anti-competitive practices’ by large iron ore suppliers. ‘We are sometimes a bit surprised at how similar the pricing of the big miners is,’ Mr Eder said.”

Source: Financial Times, May 16 2010

Observations:

  • After years of pressure by the large mining companies and triggered by Chinese steel makers unwilling to follow benchmark prices the annual pricing system for iron ore has been replaced by a more flexible system.
  • Ore prices in the new system are significantly higher than in previous years, leading to higher prices of steel products.
  • Eder hints at potential cartel-agreements between the large iron ore producers. Some steel makers suspect the miners keep prices high artificially through (illegal) price agreements.

Implications:

  • Eder’s comments will partly be driven by wishful thinking and partly by the knowledge that the best way to make future changes to the new pricing system possible is by keeping all options open.
  • Parallel increases in ore prices can for a large part be explained by variations in mining costs (mainly fuel costs, but also changes in tax system), incurred by al miners. If the miners have nothing to hide, they won’t protest against investigations by governments into price fixing. If they do protest, they will raise suspicion.
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