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No respite for steel makers soon

Kunal Bose 

Miners and traders came to accept in September that with industry across the globe facing grievous economic strain, sooner than later steel making raw materials like iron ore, metallurgical coal and ferrous scrap would come under pressure. But, they certainly were not prepared for the 16 per cent price fall in iron ore in the final week of last month. Reuters describes this as the most precipitous price slide in a week for one of the two most globally important dry bulk commodities, the other being coal. The benchmark 62 per cent iron content material traded at $181 a tonne as recently as September 7 and now traders will be lucky to make deals at $120 a tonne. In tandem, scrap is selling at its lowest for almost a year.

The price collapse has provoked Metal Bulletin to make the sly observation that only a few months ago, the world heard much about robust fundamentals of iron ore and “its surprising immunity from turmoil laying waste to other commodity ” Once the world’s leading miners were able to armtwist steel makers into migrating to quarterly contracts last year from a three-decade-old practice of yearly price agreements, they, led by BHP Billiton, started a campaign for even shorter duration contracts for iron ore. Is this not now proving to be the nemesis for miners? Analyst with UBS Commodities Tom Price says more than half the iron ore is now sold on spot prices. When ore trading is largely on spot basis, mineral prices will more closely follow steel prices than when ore price contracts are on annual or quarterly basis.

Miners knew prices that iron ore and coal were commanding earlier this year were not sustainable. In January, Indian exporters of 63.5 per cent iron content ore could do business at $190 a tonne, while Platts 62 per cent ore index was at $182.50 a tonne. That was also the time, when supply disrupting rains in Brazil and ahead of Lunar New Year brisk buying by China led many experts to believe that ore prices could cross $200 a tonne in February. The world has come to live with the fact that moves by China, which last year alone lifted 619 million tonnes out of the world trade in the mineral of 1.068 billion tonnes, will perforce have a decisive bearing on iron ore prices. An Indian ore exporter says the answer to last month’s price collapse is in huge ore imports by the world’s biggest producer and user of steel made up to September. The Chinese ore imports of 60.57 million tonnes in September were the highest since January. And, the first three quarter (January to September) imports at 508 million tonnes were up 11 per cent on-year.

It is no surprise, then, that Chinese steelmakers are now found to be drawing down iron ore from inventories, restricting their buying to the minimum. The exporter says “how could the ore market be any different when we find that nine major ports in China have stockpiles of 98 million tonnes of imported ore.” What is also proving a damper for the ore market is the Chinese credit squeeze. The trade is wondering if Chinese prime minister Wen Jiabao’s assurances of credit squeeze adjustments will result in more money in the hands of ore buyers. In the recent years, China was seen applying a brake on buying ore in October, only to be back in the market in mid-December to compensate for the inevitable slowdown in supply from domestic mines during the severe winter days. What, however, makes last month stand out from the routine is the degree of Chinese stepback in ore buying creating a great degree of mismatch in demand and supply.

To go by what the vice chairman of China Iron & Steel Association, Zhang Changfu, has said on the subject, the situation is unlikely to get better too soon. He is expecting ore prices to remain weak, with “no demand recovery in sight. After China’s daily steel output remained 1.9 million tonnes for close to nine months, it fell to 1.79 million tonnes in mid-October, with mills finding machine overhaul a better option than adding to steel supply glut.” China apart, Europe, where ArcelorMittal and others have either switched off blast furnaces or postponed commissioning of newly relined ones in view of falling demand for steel, is also held responsible for the debacle in iron ore prices. Now, the ore market will also take its cue from Moody’s paring its outlook for the European steel industry to negative. Moody’s says steel demand in the 27-nation European Union may contract by up to four per cent in the next 12 months, as the region encounters “economic strain and weak construction and auto markets”.

No wonder European steel producers are facing the grim prospect of “material decline in profitability” in the second half of this year and first six months of 2012. The EU scene is such that the Brazilian Vale, faced with cancellation of orders by some EU mills, had to send extra shiploads of ore to China.

First Published: Tue, November 08 2011. 00:01 IST