iron ore contract prices will fall 30%

Iron ore contract prices will fall 30% - analysts

February 26, 2009

By Brett Foley

Vale, Rio Tinto and BHP Billiton, the top iron ore producers, may get 30 percent less for the commodity this year under annual contracts after a slump in steel demand.

The drop, based on the median estimate in a survey of eight analysts, would snap six consecutive years of gains.

Global steel output plunged 24 percent last month compared with a year earlier, the World Steel Association said last week.

The price of hot-rolled steel coil, which is used in construction and cars, has fallen 53 percent from record highs set last July, according to data compiled by Steel Business Briefing.

"When you step back, things are still universally bearish and are likely to be like that for at least the next six months," said Max Layton, a commodity analyst at Macquarie Group.

China's steel industry, the world's largest, is seeking price cuts from iron ore suppliers after costs for the raw material and other ingredients such as manganese and coking coal soared to records last year.

A 30 percent decline would be the biggest drop since at least 1981, according to Macquarie's data. Prices rose as much as 97 percent last year.

Iron ore producers were seeking an increase of as much as 5 percent this year because they considered the market to have bottomed, the Wall Street Journal reported, citing people familiar with the talks.

Eugen Weinberg, an analyst at Commerzbank in Frankfurt, wrote in a report yesterday: "Unlike these producers, we see few signs of demand picking up again and do not believe that demand has bottomed out yet.

"We rather see a danger of the spot price of iron ore coming under additional pressure and contract prices being hit accordingly."

Iron ore for shipment to Chinese ports dropped to $82 (R818) a ton last week, the first decline in four weeks, according to data compiled by Metal Bulletin. The spot price has fallen 58 percent in the past 12 months.

Talks on ore contract prices between Shanghai-based Baosteel Group, China's largest steel maker, and London-based Rio Tinto started last month.

Annual supply contracts start on April 1, the beginning of Japan's fiscal year.

Brazil's Vale, the largest iron ore producer, said on Friday that it was no longer the "price setter" and was taking a "wait-and-see" position in contract talks with Asian steel makers.

Rio Tinto, the second-biggest producer, declared a so-called force majeure for this month's and next month's deliveries from Western Australia after rail lines connecting mines with the coast were flooded, according to a letter from the company dated on Monday.

Force majeure is a legal clause allowing companies to miss deliveries because of circumstances beyond their control.

- Bloomberg