Australia's ABARE predicts sharp jump in iron ore prices in 2008
SYDNEY (Thomson Financial) - Iron ore prices are expected to rise substantially next year to record levels, marking the sixth consecutive year of rises, the Australian Bureau of Agricultural and Resource Economics (ABARE) said Thursday in a commodities outlook report.
ABARE said factors that would contribute to a rise in prices for ore sold under contract for the year starting April 1, 2008, include strong growth in global iron ore demand, led by production growth in China's steel industry and rising iron ore production costs.
China is the biggest buyer of iron ore on the global market, with its imports set to reach 370 million tonnes by the end of this year.
The introduction of an iron ore export duty by the Indian government will contribute to supply tightness while the sharp depreciation of the US dollar will also add to the case for price rises, ABARE said.
Price negotiations
Annual price negotiations between major suppliers, including BHP Billiton (LSE: BLT.L - news) , Rio Tinto (Stuttgart: 855018 - news) and Brazil's CVRD, are now getting underway with analysts tipping price rises in excess of 30 percent because of supply tightness.
Macquarie Equities, in a report last month, tipped a 50 percent hike in prices, following a modest 9.5 percent rise in prices for the year starting April 1, 2007. Ore prices were raised 71 percent in the year starting April 1 2006.
The current divergence between spot and contract prices is likely to underpin price rises at the 2008-2009 negotiations, ABARE said.
During 2007, the spot price of Indian iron ore imported by China marked a sharp rise to 180 US dollars a tonne, including cost insurance and freight (cif), from around 80 a tonne.
The landed cost of Australian iron ore sold on a contract basis to China is now more than 100 dollars less than Indian iron ore sold on a spot basis to Chinese steel mills, ABARE said.
Higher shipping costs due to a shortage of bulk carriers and rising fuel costs, are an additional concern for steel mills shipping iron ore from ports in Australia and Brazil, it said.
From January to August 2007, spot freight rates between Australia and China rose by 48 percent cent, or 8 dollars a tonne, while spot freight rates from Brazil to China rose by 83 percent, or 27 dollars a tonne.
ABARE said Japanese and European steel mills tend to have long-term shipping contracts
that partly insulate them from rising shipping costs. In contrast, very few Chinese steel mills have long-term shipping contracts, leaving them exposed to movements in spot freight rates.
Higher coking coal costs
Steel mills can also expect to pay more for coking coal used in the steel-making process, the government agency said.
Strong global demand for coal and supply difficulties due to rail and port infrastructure constraints in Australia have set the scene for higher prices, it said.
'World metallurgical coal demand is strong, driven mainly by expanding steel industries in China and India,' ABARE said.
Growth in world demand for metallurgical coal has not been met by a corresponding increase in Australian coal export infrastructure, resulting in long shipping queues at Australian coal ports.
'High demand for metallurgical coal combined with supply constraints indicates that contract prices are likely to rise during the upcoming negotiations,' ABARE said.
Last month Gerard McCloskey, chairman of coal industry analysis firm McCloskey Group, told his company's Australian coal industry conference BHP was hoping to win a rise in coking coal prices to 145 dollars a tonne for the year starting April 1, 2008 from the current benchmark price of 98 dollars a tonne.
BHP will lead the coking coal price talks with Japanese steel mills, led by Nippon Steel Corp (Berlin: NPS.BE - news) , in what is expected to be a tough round of negotiations.
Steel mills can take some comfort from strong steel prices.
ABARE said that in 2008, world steel prices are expected to remain high, reflecting higher steel making costs and growing steel demand.
'Steel making costs are expected to rise as a result of high freight costs and higher prices
for iron ore and metallurgical coal, the two key steel making ingredients,' it said.
World crude steel consumption is estimated to be 1.3 billion tonnes in 2007, around 7 percent higher than in 2006, and is forecast to rise by 6 percent in 2008 to 1.38 billion tonnes.
'China continues to be the most important driver of global steel consumption, with consumption
estimated to be around 448 million tonnes in 2007 and about 493 million tonnes in 2008,' the agency said.
This means that China would account for 60 percent of growth in global steel consumption in 2007 and 56 percent in 2008.
ASX Price at posting:
0.0¢ Sentiment: Buy Disclosure: Held
(20min delay)