Home > Market change > Steel glut to hit iron ore price

Steel glut to hit iron ore price

August 30, 2010

“The price of steelmaking commodities iron ore and coking coal will drop next quarter for the first time in a year as lower steel production forces global miners Vale of Brazil and UK-listed Rio Tinto and BHP Billiton, to offer discounts on their supply contracts.

The cost of iron ore and coking coal is key to the global economy as it affects steel prices and the cost of everyday goods. It is also crucial for the profitability of the mining and steelmaking sectors, two of the world’s largest heavy industries.

Mining executives and analysts estimate that iron ore prices for the fourth quarter will drop by 10-15 per cent and coking coal prices by 5-10 per cent. The falls will either push down steel prices or widen steelmakers’ profit margins.”

Source: Financial Times, August 29, 2010

Observations:

  • After introduction of the spot price linked pricing system the iron ore price has increased almost 100%. The projected price cut will be the first time the new system leads to a price decrease.
  • New price is expected to be around $135/ton, which still allows for a 35%+ profit margin for the large miners.

Implications:

  • The pricing system causes a faster response of mining production than in the old system. Although the miner’s profits will be lower in the 2nd half of the year, the balance in the value chain will help the demand to stabilize and growth to return.
  • Vale was the first of the large iron ore miners to announce price cuts, assuming the lead role in the global market. Traditionally BHP Billiton and Rio Tinto would lead the benchmarking pricing decisions.

©2010 | Wilfred Visser | thebusinessofmining.com

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  1. August 30, 2010 at 6:35 pm

    Steel companies lament the pricing power of their iron ore suppliers. Supply Chain Management

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