Posts Tagged ‘pricing’

Mining Week 48/’11: Change in Brazil & Tax in Australia

November 27, 2011 Comments off

Top Stories of the Week:

  • Australia’s Mineral Resource Rent Tax approved by lower house
    • The new 30% tax on profits above A$75mln for coal and iron ore projects has been approved by the lower house and is now only to be approved by the senate. The tax has been debated for approx. 2 years. Initially proposed by Kevin Rudd, the former premier, the regime has been tuned down and now includes arrangements to stimulate and protect investments.
    • Sources: Wall Street Journal; Financial Times; Australian Treasury MRRT explanation
  • Vale appoints new CFO: Tito Martins
    • Tito Martins, Vale’s head of base metals, has been appointed as the new CFO of the company. Several executive management positions changed in the first major move of the new CEO to strengthen control. Mr. Martins was involved in the acquisition of Inco, which turned into Vale’s base metals division which was led by Mr. Ferreira.
    • The change of top management of Vale was started by appointing Murilo Ferreira CEO in the place of Roger Agnelli after the presidential elections in Brazil. One of the reasons of conflict between government and Vale was the building of a fleet of iron ore carriers in Asia rather than domestically. This fleet was in the news this week as Chinese ports are refusing to host them, trying to protect the interest of incumbent shipping lines.
    • Sources: Vale’s press release; Financial Times
  • Rio Tinto bids for uranium explorer

Trends & Implications:

  • The changes at Vale should prepare the company for further changes to the business environment for the major iron ore producers. The introduction of the MRRT mainly hits Rio Tinto and BHP Billiton, but all three majors are figuring out how to react to increasing uncertainty about demand. Asian steel producers are pushing for adaptations to the recently changed pricing mechanisms, moving the pricing system to shorter term contracts. At the same time various Asian players are starting to buy iron ore assets in the price range of hundreds of millions to several billions of dollars; threatening the dominance of incumbents.
  • Rio Tinto is trying to buy into uranium at a moment where industry shares are depressed because of the nuclear disaster in Japan last year. The bid for Hathor signals Rio’s management still believes in the potential of the industry. The company says it accounts for 16% of the world’s uranium production from mines in Australia and Namibia.

©2011 | Wilfred Visser |

BHP Billiton and Rio Tinto growing in potash

October 6, 2011 Comments off

“Rio Tinto, the Anglo-Australian mining group, is re-entering the potash business through a joint venture with a Russian fertiliser producer which holds extensive exploration permits in the Canadian province of Saskatchewan.

Rio will initially acquire a 40 per cent stake in nine blocks covering an area of 241,000 hectares currently held by North Atlantic Potash, a subsidiary of Russia’s JSC Acron. Under the deal, Rio can eventually raise its stake as high as 80 per cent.”

Source: Financial Times, September 28 2011

“Mining heavyweight BHP Billiton is “aggressively” pursuing potash projects in Saskatchewan along with its Jansen asset, the company said on Wednesday.

“Although these are at an early stage, the data acquired suggests they have the ability to support significant potential developments,” spokesperson Ruban Yogarajah said, adding that the combined properties could “at least” match Jansen’s planned output of eight-million tons a year.

BHP Billiton in June said it approved a further $488-million to develop Jansen, bringing its total investment in the project to $1.2-billion.”

Source: Mining Weekly, September 29 2011


  • Approx. 33mln tons of potash are mined annually, with Canada accounting for approx. 30% of global production. With price per ton of around $400-$500 the global market totals $13-17bln annually.
  • Both BHP Billiton and Rio Tinto are planning to move or expand in the Potash industry. BHP Billiton already is operating in Saskatchewan and tried to make a big move by taking over PotashCorp last year. Rio Tinto sold its potash exploration projects in 2009, but tries to re-enter in a JV with a small Russian player.


  • The potash market it currently dominated by 2 marketing ‘cartels’: Canpotex (PotashCorp, Mosaic, Agrium) and BPC (Belarusian Potash Company: Silvinit & Uralkali), which control close to three quarters of global sales and typically copy each others pricing agreements with large customers. The rise of the large diversified players in the business (apart from BHP and Rio, Vale is also building its potash business) could break the power of these cartels and might move the market to pricing based more on spot prices.
  • From a technology and production standpoint it makes a lot of sense to have diversified mining companies, specialized in running large scale extraction projects, operate potash mines. Only on the marketing and sales side of the business synergies will be hard to realize, but companies like BHP and Rio Tinto have the experience and size required to set up a strong marketing presence.

©2011 | Wilfred Visser |

World Steel Association: World crude steel output increases by 15% in 2010

January 27, 2011 Comments off

“World crude steel production reached 1,414 million metric tons (mmt) for the year of 2010. This is an increase of 15% compared to 2009 and is a new record for global crude steel production. All the major steel-producing countries and regions showed double-digit growth in 2010. The EU and North America had higher growth rates due to the lower base effect from 2009 while Asia and the CIS recorded relatively lower growth.

Annual production for Asia was 881.2 mmt of crude steel in 2010, an increase of 11.8% compared to 2009. Its share of world steel production increased to 65.5% in 2010 from 63.5% in 2009. China’s crude steel production in 2010 reached 626.7 mmt, an increase of 9.3% on 2009. China’s share of world crude steel production declined from 46.7% in 2009 to 44.3% in 2010.”

Source: World Steel Association, January 21 2011


  • Annual steel production has increased to a new record, fully recovering from the reduced production in 2009. This reduction was fully caused by production outside China. Chinese production has increased every single year for the past decade.
  • The new iron ore pricing system leads to complaints about higher raw materials costs with many steelmakers (current spot price at $175/tonne). The recent spike in coal costs (currently up to $350/tonne) further reduces the margins of the steel makers. American producers are posting significant losses.


  • Focus of the industry is on the new tax policies to be introduced in China to cool down the economy. Increased consumer prices of steel might have a significant impact on the growth rate of the Chinese industry, starting in the second half of 2011.
  • Across the world the increased prices of raw materials will be passed on to customers, as the mining and transportation costs are not likely to return to the levels of early 2009 with global supply conditions.

©2011 | Wilfred Visser |

Steel price rise stokes inflation concerns

January 17, 2011 Comments off

“The price of steel has risen more than a third in two months, adding to global inflationary pressures as food and energy costs are also soaring. Floods in Queensland have severely disrupted global supplies of coking coal, a major steelmaking ingredient, prompting a scramble among manufacturers to stock up on steel.
That has pushed the price of benchmark US hot-rolled coil steel 37 per cent higher since early November to a two-year high of $783 a tonne, said CRU, a consultancy.

Spot cargoes of coking coal have traded as high as $350 a tonne – up 55 per cent from quarterly contracts agreed at $225 just a few weeks ago. Iron ore, the other major ingredient in steel, is rapidly rising towards record high prices, with benchmark grades delivered to China up 20 per cent since the start of November at $178.30 a tonne.”

Source: Financial Times, January 16 2011


  • In the interview on the FT-site Edward Hadas places the coal supply disruptions in Queensland due to weather conditions in the context of global commodity price increases over the past months. Key drivers for the continuing price increase are the increasing demand from China and India; the access to cheap money that fuels the demand; and the general shortage on the supply side, which has temporarily been increased by flooding.
  • Hadas argues that only some 20% of the global commodity trade volumes are affected by the weather conditions. This includes commodities like coffee and tea, for which production is much more susceptible to weather conditions than for mined commodities.


  • Although the extreme weather conditions have a definite short term impact on coal and iron ore prices, they will not change the pricing in the long term. However, increased occurence of extreme weather conditions due to climate change will certainly make global commodity markets more volatile.
  • The transition to a quarterly pricing system for iron ore will enable the iron ore miners to rapidly pass on increased costs to the steel makers, further increasing the raw material costs.

©2011 | Wilfred Visser |

World Steel Association expects record 2010

October 5, 2010 Comments off

“Stronger-than-expected increases in steel demand in Europe, Japan and the former Soviet Union are propelling the global steel industry to a robust recovery this year, according to forecasts released by the World Steel Association. The association – the main trade body for the sector – said on Monday that global consumption of the metal would increase by 13.1 per cent in 2010 to a record level, above a forecast of 10.7 per cent made in April.

Next year demand for all grades of steel – the most widely used industrial material, which goes into a range of sectors from cars to toy manufacturing – is likely to rise by a more modest 5.3 per cent to hit a fresh record of 1.34bn tonnes.”

Source: Financial Times, October 4 2010


  • Last week both the CEO of ThyssenKrupp and the head or the iron ore division of Vale announced similar expectations about the demand for iron ore. Vale expects the price of ore to remain high, although analysts expect the price to drop by approx. $15/t.
  • In June of this year various steel producers warned for potential overcapacity in the industry, caused by low growth expectations for China. However, most steel makers have gained confidence that the risk of a double dip recession is limited.


  • This year’s change of the iron ore pricing mechanism to a system linked to the spot price of the ore is an incentive to business leaders to try to influence the spot price. Published expectations on the demand and supply of ore and steel by various companies can be seen as part of the game of influencing the price and the strategy of suppliers and customers.
  • The effect of announcing high demand expectations by steel makers works in two directions: it is a signal to the mining industry to step up production, which causes price of ore to drop in the long run; at the same time it might increase the price of ore in the short term as demand drives the price up.

©2010 | Wilfred Visser |

Steel glut to hit iron ore price

August 30, 2010 1 comment

“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


  • 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.


  • 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 |

Steel chief predicts miners will lose advantage

May 17, 2010 Comments off

“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


  • 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.


  • 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.

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

April 30, 2010 Comments off

‘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


  • 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.


  • 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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