The Hindu Business Line : Chinese spot iron ore prices touch new high

Mumbai, Sept. 3 Iron ore prices are spiking like never before; and there seems to be no stopping their northward journey. For the steel industry it should be a matter of serious concern as iron ore constitutes the major bulk of raw material cost.

Reports from the world’s largest steel producer China indicate a rapid increase in spot iron ore prices which has sent shock waves across smaller steel mills and traders.

Booming production

Steel production in China is booming and import supply shortfalls have been felt. Buyers are scrambling to cover their requirement before the onset of winter season.

All these have combined to push the spot market for iron ore to new highs in China. Supplies from India reached a record $140 a tonne c.i.f (cost, insurance, freight) to China recently, marking a whopping 87 per cent rise from $75/tonne early this year.

In addition to rising ocean freight rates that have pushed the landed cost of iron ore up, even within India spot market for iron ore has been rising in recent months.

On a f.o.b (free-on-board) basis, from the equivalent of less than $60/tonne during January-March this, prices have spurted to breach $100/tonne now. This is despite the strengthening of the rupee in recent months.

Interestingly, only China has a significant spot market for iron ore. All iron ore sold outside China is virtually on an annual contract basis.

Implications

There are two main implications from these recent developments, according to Macquarie Research Commodities. One is a major short-term squeeze on the margins of steel-makers exposed to the spot market in China.

The other implication is a major upward pressure on the contract price in the 2008 annual price negotiations. These negotiations are due to start at the end of November for shipments from April 2008.

Even with further substantial increases in iron ore (and coking coal) prices, steel-makers will be able to absorb these price rises (and probably pass them on in terms of higher steel prices), it is believed.