Steelmakers brace for top ore prices

PUBLISHED : Tuesday, 19 February, 2008, 12:00am
UPDATED : Tuesday, 19 February, 2008, 12:00am


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Mainland steelmakers are bracing for higher raw material costs after their Japanese and South Korean counterparts were hit with a higher than expected 65 per cent increase in iron ore contract prices.

Japan's Nippon Steel Corp and JFE Holdings and South Korea's Posco have agreed to pay Brazilian mining giant Vale US$78.90 a tonne starting April 1, from US$47.81 a tonne. It is the industry's first major deal for the year and sets a global benchmark for the steel-making material.

The increase is expected to further weigh on the bottom line of mainland steelmakers, already reeling from the ore price rises of previous years as well as rising shipping costs.

'The increase is higher than market consensus forecasts of 50 per cent and our forecast of 20 per cent,' said Sabrina Xie Lulu, an analyst at Guotai Junan Securities. She said particularly hard-hit would be steelmakers such as Maanshan Iron and Steel and Chongqing Iron and Steel, firms where gross profit margins were already very thin and which could not pass on costs.

Maanshan Steel's gross profit margin this year would probably fall to 4.8 per cent from last year's 11.1 per cent while Chongqing Steel's margin would drop to 2.3 per cent from 10.7 per cent after the cost increase, she said.

The contract price of iron ore has risen fivefold since 2001. This year's increase is the sixth consecutive rise, after a 9.5 per cent gain last year, a 19 per cent climb in 2006 and a 71.5 per cent surge in 2005. Qi Xiangdong, vice-secretary general of the China Iron and Steel Association, the mainland's key steel industry association, said mills were likely to follow the price struck by their Asian competitors.

Normally, the first companies to agree on prices with one of the big mining firms set the benchmark for the rest of the industry. The other big global suppliers of ore - BHP Billiton and Rio Tinto - are expected to demand the same price as Vale. Together, the big three control more than 70 per cent of the world's trade.

Rio said talks with customers about contract prices for the year were continuing and it would press for a premium based on freight costs. The increase could not have come at a worse time for the mainland industry, which is also facing high coking coal and shipping costs as well as increased domestic supply caused by a slowdown in steel exports.

'Steel prices in China have been rising mainly because of cost-push factors, but costs have risen even faster,' said Helen Lau, an analyst at Daiwa Securities.

'Steelmakers are unlikely to pass on all the cost increase to customers, which will translate into a squeeze in profit margins.'

Gross and net profit margins for the mainland steel industry slid to 14 per cent and 4.6 per cent in November last year, from 21.5 per cent and 9.5 per cent in May, respectively.

A spokesman at Baoshan Iron & Steel, the listed arm of the mainland's top steelmaker Baosteel Group and the lead Chinese negotiator with ore suppliers, said he had not received any 'official notice' about whether mainland steelmakers had agreed to further price increases. Su Jiangang, general manager and executive director at Maanshan Steel, said the company needed time to discuss price arrangements with its peers.