Ore price expected to rise as demand for steel soars
Soaring demand for steel on the mainland will lead to a sharply higher price for iron ore next year, according to Macquarie Securities.
'The annual contract price could be up by more than 20 to 30 per cent, maybe higher,' Jim Lennon, the global head of commodities research for Macquarie, said at a conference in Hong Kong yesterday.
This could lead to a renewal of tensions between China and Australian iron producers BHP Billiton and Rio Tinto during negotiations of the annual benchmark price.
Last year, the miners and the mainland steel mills represented by the China Iron and Steel Association (CISA) failed to agree a price. CISA demanded a 40 to 45 per cent price cut, but the miners would offer only 33 per cent, which was in line with the benchmark price agreed with Japanese and other Asian steel mills.
CISA has been trying to talk down the country's need for iron ore by claiming that it had excess steel and that demand for iron ore was modest. This contrasts sharply with Macquarie's data, which shows Chinese steel production growing to 640 million tonnes next year.
This in turn has triggered sharp demand for coking coal and iron ore. Lennon said the iron ore spot market had jumped 30 per cent over the past month and is now more than US$100 per tonne, about 30 per cent higher than the benchmark price agreed with Japan earlier this year.
Lennon was told by an iron ore producer who had spoken to 25 Chinese steel mills at an industry conference last month that all of them were asking for extra tonnage next year as they were all bringing on extra capacity. This is despite efforts by CISA and the Chinese government to bring about a consolidation of the nation's fragmented steel industry.
But China's steel mills are now beginning to feel additional pressure for iron ore and coking coal resources as steel production in the rest of the world begins to revive.
Lennon said that when steel production in the rest of the world declined by 35 to 40 per cent in the first half of this year, iron ore producers and coal miners converged on China.
But now the producers are turning away from China and returning to traditional customers such as Taiwan, Japan, South Korea and Europe. Korea is utilising all of its capacity while Japan is back up to 85 per cent.
'So we see this tremendous competition for iron ore and coal developing over the next three to six months between China and the rest of the world,' said Lennon.
'We can see that spot price moving up to US$120 to US$130 over the next two or three months, which will take it dramatically higher than this year's benchmark price.'
China's demand has come on the back of strong end-user demand for infrastructure, boosted by the four trillion yuan (HK$4.54 trillion) stimulus package in December last year. Construction, housing and shipbuilding have seen growth of between 30 and 50 per cent, while the car industry has grown 90 per cent year on year.