Tuesday 28 October 2008
Iron Ore Game Changes as India Drops Spot, Goes Long-Term
At the moment, when the iron ore business is widely seen as a buyer’s market, Chinese steel companies are not directly contradicting the giant Brazilian and Australian suppliers in contract negotiations for long-term iron ore supply in 2009. Their strategy is to gain ground by disrupting the big three’s control over Indian spot iron ore prices and sea freight charges.
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Iron Ore Game Changes as India Drops Spot, Goes Long-Term
27 October 2008
At the moment, when the iron ore business is widely seen as a buyer’s market, Chinese steel companies are not directly contradicting the giant Brazilian and Australian suppliers in contract negotiations for long-term iron ore supply in 2009. Their strategy is to gain ground by disrupting the big three’s control over Indian spot iron ore prices and sea freight charges.
Both the sensitive Baltic Dry Index, covering dry bulk shipping rates, and Indian spot prices have slumped, so any presumption for a price hike, ever-present previously before the annual negotiations, has left the building. Sanjiv Batra, chairman of India’s largest mineral exporter MMTC, revealed recently at an international seminar on raw materials for China’s steel industry that the Indian government has agreed to negotiate long-term contract supply with Chinese steel makers, and companies from the two countries were working on the issue.
Apart from long-term contracts with Brazil’s VALE and Australia’s BHP Billiton and Rio Tinto, China is home to the world’s largest iron ore spot market, on which Indian and domestic iron ores are traded. Due to China’s scattered steel industry, many small and medium steel companies who have no seat at the contract negotiation table are highly dependent on Indian spot iron ore, rich in supply though low in quality, a market structure that has forced many Chinese steel companies into passivity.
The Indian spot price has before been decided by the three mining giants after long-term contracts have been decided through negotiation. Usually they increase the demand for Indian spot iron ore by delaying or canceling their own shipments, which pushes up the CI price for Indian spot iron ore and gives impetus to contract price increases for the next year.
However, now both the Indian spot price and the Chinese domestic iron ore price are lower than the contract price. Since spot transaction is not the mainstream in the international iron ore trade, once domestic iron ore demand drops, spot iron ore will be the first to see prices decline.
Production drops by Chinese steel companies and greater use of domestic iron ore has quickly reduced the demand for Indian iron ore, forcing Indian spot prices below the contract price for the first time in the past seven years, and Indian mineral suppliers are now having to accept long—term contract supply. In the bullish market, the iron ore mining giants had the upper hand over Chinese companies through the Indian spot market, but things have now changed.
As Indian suppliers accept long-term contracts, Chinese steelmakers have released the news at once, hoping the 2009 long-term contract and spot price and iron ore prices for Europe and Asia will stay the same. China’s steel industry hopes to force the three iron ore giants to make concessions on the annual negotiation mechanism with the compromise of Indian mineral suppliers.
Steelmakers are also trying to gain the initiative on sea freight charges. Major Chinese shipping companies have contacted domestic steel makers to expand their business and strengthen their pricing power on international sea freight at the same time. BHP Billiton and Rio Tinto both have their own fleets, and participate in the trade of sea freight spots and futures. To grab as much profit as they can, they reduce sea freight charges before the negotiation and then boost it. 95% of the high CIF price for Indian iron ore is taken by the transporter. As the long-term contract price for Chinese steelmakers is also the CIF price, how much of the sea freight charge comes their way will decide their actual interest.
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