Global iron ore & steel outlook - part two

By Freya Purnell

It’s not all about China, however – a recovery in the pace of crude steel production in the developed economies will also play a role.

To read the first part of this story click here.

Contract negotiations underway
Following an ultimately unsuccessful negotiation last year, this year’s contract price discussions are already underway, with Chinese steel giant Baosteel taking a leading role and the Chinese government also represented.
While it is difficult to predict what the outcome would be, Heap believes there is clearly an appetite among the major Chinese steel mills to secure contracts.
“We are expecting it to be a long, hard negotiation, but I think this year, everyone would be much happier if negotiations were settled in a more amiable manner than occurred last year,” Jones said. “When contract prices are not in use, there is no certainty for either the exporter or the importer.”
And as economic conditions change, there may be more incentive for China to settle on prices quickly.
“With prices starting to go up in the spot market and robust demand for iron ore, if anything, the market is going to be tighter than it was in 2009,” Baker said.
If negotiations are unsuccessful again, is there potential for the benchmark pricing regime to break down completely? If BHP has its way, maybe, said Heap.
“They are adamant they want to see the iron ore market transition away from contracts towards spots. The other two major producers are less convinced, and Vale in particular is fairly anti-spot pricing.”
Others believe that the certainty a contract system provides will remain attractive for buyers, and while there may be some tweaks to the system or a reduced proportion of iron ore sold through contracts, the regime will prevail in some form.
“I think over time we will see an evolution, where the benchmark price will apply for around 50 per cent of the market and 50 per cent will be various other deals, whether they are pure spot or index-linked contracts or an exchange-traded entity,” Baker said.
The strength of the market looks set to continue at least into 2011. But with significant amounts of new capacity either planned or in development both in Western Australia and elsewhere, prices could start to level out as production comes onstream.

To read the first part of this story click here.

Higher Australian dollar hurts commodity export earnings
Earnings from energy and minerals exports are forecast to fall by 20 per cent to close to $129 billion in 2009-10, according to the Australian Bureau of Agricultural & Resource Economics (ABARE).
“The combined effect of lower bulk commodity contract prices, including for coal and iron ore, and an assumed stronger Australian dollar is expected to more than offset the positive effect on earnings of forecast higher export volumes in 2009-10,” said Dr Terry Sheales, deputy executive director, ABARE.
ABARE recently reported that demand for steel is expected to continue to grow over 2010, further increasing demand for iron ore and metallurgical coal - Australia’s two largest commodity export earners.
In 2009, significant idling of steel-making capacity early in the year, associated with the global economic slowdown, is estimated to result in an 8 per cent decline in global steel production, to 1.2 billion tonnes. Lower production in OECD economies is expected to be partially offset by an estimated 14 per cent increase in China’s production. In the final months of 2009, some idled production capacity was restarted and, in line with assumed improvements in world economic growth, global steel production is forecast to increase by 10 per cent to 1.4 billion tonnes in 2010.
World trade in iron ore is forecast to increase by 8 per cent to 987 million tonnes in 2010, compared with an estimated rise of 2 per cent in 2009. The main contributors to increased import demand are likely to be China, Japan and the European Union. However, import volumes to most countries, with the exception of China, are forecast to remain well below those of 2008.
Australian iron ore exports are forecast to increase by 9 per cent to 394 million tonnes in 2010, when significant additional production and export capacity is scheduled for completion.
Rio Tinto’s Brockman 4 and Mesa A projects are expected to provide an additional 47 million tonnes of capacity, CITIC Pacific’s Sino Iron Project is expected to add 28 million tonnes, and BHP Billiton’s Rapid Growth Project 4 is expected to add 26 million tonnes. These capacity expansions will provide support for production and export growth in 2010, with the full effect expected to reach beyond 2010.
In 2009-10, Australian iron ore production is forecast to increase by 20 per cent to 425 million tonnes. This reflects the ramp up of capacity at Rio Tinto’s Hope Downs operation, continued growth in production at Atlas Iron’s Pardoo DSO operation, and higher production volumes from BHP Billiton operations, despite tie-in activities associated with the Rapid Growth Project 4.
Despite higher production volumes, Australian export earnings from iron ore are forecast to decline by 15 per cent to $29 billion in 2009-10, primarily as a result of lower contract prices for Japanese Fiscal Year 2009 (JFY, April 2009 to March 2010).
Lower contract prices and an assumed appreciation of the Australian dollar against the US dollar is expected to more than offset the effect of a forecast increase in export volumes, said the report.

AJM’s13th Annual Global Iron Ore & Steel Forecast Conference
March 23-24, 2010 – Sheraton Perth Hotel, WA
The next instalment of the AJM’s premier iron ore and steel event will be held at the Sheraton Perth and promises to be the biggest event yet. More than 120 executives have already secured their seats at the must-attend event of the year which attracts the highest quality range of industry players and commentators to present their views and forecasts for the year ahead.
The conference will address key pricing issues, the development of the iron ore index, production rates, new projects, as well as the challenges of infrastructure building and skilling the workforce.
The program also includes a number of social and networking opportunities for delegates to choose from.
To book your place, or to enquire about The 13th Annual Global Iron Ore & Steel Forecast Conference, contact tel: +61 (0)2 9080 4307 or email registration@informa.com.au