56
Chinese steel makers to apply a 65% to forecasts, and over 200% higher than the 2007 upwards of US$150 representing a 30%
UIforwardUIforwardUIforward
71% price increase for iron ore effective contract level of US$98 per tonne. At the latest increase on just a month prior.
April 2008. price coking coal is over three and a half times
Rio Tinto and BHPB continue to negotiate, more expensive than in 2003. Bulk shipping
seeking a price premium (which could bring Spot prices in the first quarter of 2008 had Iron ore, coke and scrap have to be transported
their increases in contract prices as high as run at over 3 times contract levels – reaching to steelmaking facilities across the world. Land
85%) to reflect the lower cost of shipping from US$330 per tonne. Forecasts for 2009 are for transport is mainly by train and in Australia the
Australia as opposed to Brazil. Both companies coking coal contract prices to remain robust. growth in world demand has outstripped rail
have now set an end of June deadline for Prices for internationally traded coke have and dock capacity, creating supply bottlenecks.
Chinese steelmakers to agree contract increased steeply over the last year, in Bulk shipping capacity has also lagged
increases or face ore being supplied at spot February hitting US$475 per tonne, 224% substantially behind the growth in world
prices. higher than in 2003. This is significant for EU demand over recent years.
Spot prices had already soared above steelmaking, which is not self sufficient for In early 2008 bulk sea freight rates did fall,
contract levels, more than doubling since coke. having risen steeply throughout 2007 to
January 2007, and hitting US$236 per tonne in
C o ki ng C oa l C on t rac t
around 2.5 times that at the beginning
February. Supply bottlenecks were exacerbated
Prices
of the year. Latest 2008 figures shows
Goonyella Benchmark Grade FOB Australia
earlier this year by extreme weather in costs are increasing again with
300
Australia, resulting in miners claiming force projections they will return to peak
majeure in order to sell at spot rather than 2007 levels.
250
2007 contract prices. Rio Tinto has made it
clear it wants to move away from fixed annual 200 Energy
prices and to sell more on the lucrative spot The world cost of oil is now running
US$
market.
150
persistently in excess of US$100 per
barrel – and recently hit US$120. Prices
100
at the fuel pumps, along with domestic
50
gas and electricity costs, are a constant
reminder that energy costs are at
0 unprecedented levels. Forward prices
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 (est)
for the wholesale gas and electricity on
Domestic coking coal prices in China, which steel producers rely show continued
although significantly lower than world levels, increase.
are increasing rapidly and hitting Chinese steel
making costs. According to CISA coking coal Consolidation in the steel market
accounts for 15-20% of steel production costs, In recent years there have been a series of
indicating that current increases in domestic headline making mergers and acquisitions. The
prices of around RMB150-200 per tonne would top ten steel producers, led by Mittal Arcelor,
feed through to 4 to 5% increases in the price now account for around 27% of world capacity.
of crude steel. In China the government aims that 50% of
It should also be noted that the vast steel output should come from ten producers
Iron ore costs for all steelmakers, across the majority of China’s electricity is generated from by 2010, currently the figure is 35%.
world, were already increasing and have coal and that the factors affecting coking coal Consolidation means a more structured
increased dramatically from April 2008. 2008 are also affecting power coal. While electricity market, more specialisation, a tighter balance
ore prices will be around 360% higher than prices in China are government regulated, between supply and demand and more robust
those in 2003. generators will lose money if they are not able market pricing. The major steel players have
Steelmakers sourcing ore on the spot to pass on increased cost to electricity savoured profits over recent years, and are
market have already been hit hard. The customers. intent on holding on to them.
Chinese Iron and Steel Association (CISA) says
that the cost of imported iron ore in January Ferrous scrap China’s role in the steel market
and February (predating the new contract Required for both steel-making processes but In recent years China transformed from a net
prices) averaged US$128.50 per tonne, 84% absolutely crucial for Electric Arc Furnaces, importer to a net exporter of steel – in 2007
higher than the same months in 2007. ferrous scrap is a product of consumption, exporting 62 million metric tonnes (mmt). The
which makes the US and Europe major effect was to suppress world steel prices.
Coke suppliers. Historically, large volumes of scrap During the second half of 2007 China throttled
Although there is a wider range of suppliers in have also been sourced from Russia and some off exports, replacing export rebates with a
the market, and China has been a major of the CIS countries, like Ukraine, but these surcharge that now stands at 25%. Reasons for
player, Rio Tinto and BHP Billiton are, again, supplies are slowing down now. this action included reductions in pollution,
significant suppliers of coking coal from The scrap market is volatile. However the particularly around Beijing in the run up to the
Australia. trend over the last two years has been Olympic Games. The government is now
Prices had trended downwards from a peak upwards, heading back towards peak levels enforcing a longstanding policy to close
in 2005/6 but remained double pre-2004 experienced in 2004. At the beginning of 2008 smaller, less efficient and higher polluting steel
levels. Recent problems in Australia - extreme prices in Europe jumped by 20% - higher still mills.
weather and supply chain bottlenecks – are in the UK – and US prices also hardened. Since The largest steel works in Beijing is
expected to result in a shortfall of 14 million then the market has continued to rise and progressively being shut down and relocated
tonnes for 2008. there are persistent reports of scrap shortages this year, with only one out of four blast
International contract prices for coking coal affecting mills in Turkey and Italy. furnaces expected to still be operational by the
are now hitting figures approaching US$300 US scrap prices in the second quarter are opening of the Olympic Games. Other
per tonne, well in excess of the highest hitting record levels, with per ton increases of mills are currently understood to be UIforwardUIforwardUIforward
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