In what has been described as a “global iron ore price revolution”, the manner in which iron ore is priced is undergoing a fundamental shift. This has profound implications for the steel industry and those industries — construction, architecture, engineering and more — where steel is a critical input material.
Until recently, iron ore prices were set annually, so the steel industry (and the industries it services) had relative certainty about this major cost component. The stability of this approach allowed the steel industry’s focus to be primarily on meeting customer needs.
The world is now in the process of moving to a more frequent approach to iron ore pricing: from annual to quarterly. Major coal suppliers are following the iron ore trend and also moving to a quarterly pricing model.
Of course, the miners are in favour of this new model because it enables prices to be negotiated more frequently and create more opportunities to increase price. It makes it more difficult for the steel, construction and architecture industries, however, to predict precise steel prices over the longer term.
Quarterly pricing model
The quarterly pricing approach, adopted by Vale, one of the world’s leading three iron ore producers, will apply a three month ‘lag’ when setting prices. So the price set on 1 October for the 2nd quarter, for instance, should predominantly reflect the average ‘spot’ (or daily) prices for the months of June, July and August.
Commodity boom
Off the back of the incredible development in China, the world is in the midst of a massive commodity boom (called a ‘super cycle’ by economists), underpinned by China’s steelmaking capacity. This started in 2003/04 and is expected to continue for some time.
Factors which impact on iron ore pricing include:
- The re-stocking of raw products to pre-empt demand (especially by Chinese mills)
- A lack of high quality domestic Chinese iron ore
- Changes in sea freight charges
- The manner in which fluctuating prices may, or may not, bring high cost miners back into production
- Weather — this influences the efficacy with which raw materials can be mined, transported and, in particular, loaded onto ships. It also influences the production of mills in northern China.
Steel producers: responding and responsibilities
This ‘revolution’ has reminded steel producers, including BlueScope Steel, of the importance of being transparent and proactive to help customers manage their own costs and operations in the best possible manner.
Raw materials, with iron ore and coal chief amongst them, account for 60 per cent of the cost of steel. Therefore any changes to the pricing structure (and prices) of iron ore and coal will, logically, impact on the cost, and thus price, of steel. One of the major challenges for steel producers is how we can adapt to this change and ensure that steel prices remain competitive and responsive to prevailing market conditions.
Bernie Landy is general manager, industrial markets, BlueScope Steel, which range of other steel products, for the Australian and international markets.
