The Iron Ore Settlements and the Impact on Steel Prices
There is a tremendous amount of interest in the steel community as to how the recent annoucements of quarterly iron ore pricing will impact steel prices here in North America as well as around the world.
BHP Billiton Settles on Quartlery Contracts with 99.7% Increase
BHP Billiton has reached a quarterly settlement price with a majority of their customers. According to Macquarie Research the settlement for 62% Fe iron ore fines was $120.08/dry metric ton (dmt) which represents a 99.7% increase compared to the 2009 annual contract price. Macquarie also stated the BHP settlement is $15/dmt higher than that achieved by Vale for its 65% Fe Southern System fines.
According to an article in Platts Steel Markets Daily – based on a freight rate of $10.20/wet metric ton and with an assumption of the moisture content in the ore at 8.2% - the BHP fines would equate to $131.19/dmt on a delivered basis from Australia to China. Based on Platts iron ore IODEX index the $131.19/dmt represents a $29.31/dmt discount compared to their assessment of spot iron ore prices into China.
The BHP price for lump ore was reported to be $135/dmt fob Australia for the quarter. This equates to an 88% increase compared to the previous annual benchmark contract price.
Vale Settles with ArcelorMittal
According to Platts – Vale, the world’s largest iron ore mining and steel company, has come to agreement with ArcelorMittal for quarterly iron ore pricing based on an index. Platts – citing sources within both Vale and ArcelorMittal – “have agreed to pricing April to June deliveries of all iron ore products including fines, lump and pellets, using an average or “mean” of a published daily assessment of the spot value of iron ore fines with 62% Fe, on a CFR North China basis.”
The assessment price would then be adjusted back to a fob Brazil basis using $20/wmt (wet metric ton) as the average freight from Brazil to North China. Once calculated back to a fob Brazil price on 62& Fe product the companies would then use extras or “premiums” to account for the various Fe content material as well as lump and pellets.
What makes the change to quarterly pricing so historic is the move away from “negotiated” pricing to where the “market” will set future prices based on an index. Spot iron ore prices will take a much greater role in determining future iron ore quarterly contract pricing.
Macquarie Research, in a recent commodities report, discussed the Vale settlement and how it appears the price points were determined using the Platts IODEX assessments. “As expected, Vale have held back slightly from moving on an exact parity with the prevailing Platts 65% Fe spot price, which currently sits at an implied $142.2/t on a FOB basis, 36% above the Apr-Jun settlement. However, the $1-5.5/t figure does tie in well with the average price over the Jan-Feb this year, which averaged $107/t. This may well be indicative of how the pricing adjustment mechanism will work going forward….”
Impact to Steelmaker’s Cost
The Macquarie Research report estimates the hot rolled cost to a typical Asian steelmaker costs will rise by $130-$150 per metric ton during 2010. However, they estimate steel prices have already risen by over $130 per metric ton since November 2009. They reported the same is true for both Europe and the United States. Macquarie is forecasting based on recent price moves along with a strong futures price further price rises are “inevitable.”
Charles Bradford of Affiliated Research Group – in a report to his clients reported steel demand in China remains quite strong and he is forecasting production to increase by 10% during 2010 to 625 million metric tons (689 million short tons).
Mr. Bradford reports steelmakers outside of the United States “are reporting even stronger recoveries with world steel production up 24.5% in February and U.S. output up more than 55% for the first two months 2010.”
The impact the iron ore quarterly pricing will have on the domestic steel industry is not directly related to their costs. Most North American mills either own their own ore (USS) or have long term contracts in place which will minimize their exposure to the price volatility which will be seen in Asia and Europe with the new quarterly contracts. Prices will be higher outside of North America which will provide a base of price support to the domestic steel industry. As international prices rise we can expect a form of “push” to prices here in North America.
Reminds us of the old saying – what comes around goes around – for many years international prices help keep North American prices from rising. Now we may well be in an environment where international prices help keep North American prices propped up.
With the demise of annual iron ore and metallurgical coal contract pricing world steel prices will become even more volatile than they have been over the past few years. Steel buyers will need to remain informed, aware and on their toes. Steel Market Update hopes we will be there to assist in the process as an asset to your buying (and selling) adventures.