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An extremely tight iron ore market, punctuated by predicted shortfalls of up to 25 million tonnes and driven primarily by increased steel production in China, has seen forecasts for iron ore contract price rises ranging from 50 to 100 per cent.
InvestorTV spoke to Citi Smith Barney resources analyst Alan Heap for an insight into the current negotiations and supply issues.
“The first round of discussions with the Chinese has finished and we saw I think quite a shift of ground during that process,” Mr Heap says.
“Our understanding is that when those negotiations began the steel mills were saying an increase of 30 per cent was the maximum they could accept, but by the end of the first round they had moved to saying they could digest 50 per cent increases.
“We’re not entirely sure where the position of the producers is but we suspect that their expectations are somewhere between a 70 and a 100 per cent increase, so as we go into the second round of negotiations it looks like the spread is somewhere between the steel mills looking for 50 per cent increase and the iron ore producers looking for somewhere between a 70 and a 100 per cent increase.”
Obvious comparisons have been drawn between this year’s situation and that of 2005, when prices jumped an unprecedented 71 per cent, however several new variables have come into play.
“The market is again as tight as it was then but of course prices are a lot higher now than they were so any percentage increase is already on a much bigger number,” Mr Heap says.
“You’ve also got a whole range of other dynamics operating in the market.
“As we had then we’ve got a big spread between spot and contract prices but the spread is even larger than it was then. Australian producers are still very keen to look at the concept of pricing iron ore on a delivered basis, rather than an FOB (free on board) basis,” he says.
“The exchange rate is a new variable that’s come to the fore this time which was nowhere near as prevalent back then. Iron ore prices in Australian dollar terms and Brazilian Real terms have fallen this year, despite a 9.5 per cent increase in US dollar terms. So you’ve got quite a wide range of new and existing variables going into the negotiating mix.”
With spot Indian iron ore prices at around $US180 a tonne, more than $100 over current Australian contract prices, it seems unlikely that contract negotiations will drag out as they did for 2006-07, when prices were not settled with Chinese mills until June.
Mr Heap says: “I would be surprised if the steel mills believed that by dragging their feet the supply-demand fundamentals would swing in their favour and from the producers point of view, I think they would also be happy to get this process nailed down.”
InvestorTV spoke to Citi Smith Barney resources analyst Alan Heap for an insight into the current negotiations and supply issues.
“The first round of discussions with the Chinese has finished and we saw I think quite a shift of ground during that process,” Mr Heap says.
“Our understanding is that when those negotiations began the steel mills were saying an increase of 30 per cent was the maximum they could accept, but by the end of the first round they had moved to saying they could digest 50 per cent increases.
“We’re not entirely sure where the position of the producers is but we suspect that their expectations are somewhere between a 70 and a 100 per cent increase, so as we go into the second round of negotiations it looks like the spread is somewhere between the steel mills looking for 50 per cent increase and the iron ore producers looking for somewhere between a 70 and a 100 per cent increase.”
Obvious comparisons have been drawn between this year’s situation and that of 2005, when prices jumped an unprecedented 71 per cent, however several new variables have come into play.
“The market is again as tight as it was then but of course prices are a lot higher now than they were so any percentage increase is already on a much bigger number,” Mr Heap says.
“You’ve also got a whole range of other dynamics operating in the market.
“As we had then we’ve got a big spread between spot and contract prices but the spread is even larger than it was then. Australian producers are still very keen to look at the concept of pricing iron ore on a delivered basis, rather than an FOB (free on board) basis,” he says.
“The exchange rate is a new variable that’s come to the fore this time which was nowhere near as prevalent back then. Iron ore prices in Australian dollar terms and Brazilian Real terms have fallen this year, despite a 9.5 per cent increase in US dollar terms. So you’ve got quite a wide range of new and existing variables going into the negotiating mix.”
With spot Indian iron ore prices at around $US180 a tonne, more than $100 over current Australian contract prices, it seems unlikely that contract negotiations will drag out as they did for 2006-07, when prices were not settled with Chinese mills until June.
Mr Heap says: “I would be surprised if the steel mills believed that by dragging their feet the supply-demand fundamentals would swing in their favour and from the producers point of view, I think they would also be happy to get this process nailed down.”
