LONDON (Reuters) - Steelmakers and iron-ore mining firms are bracing for another round of fierce contract talks as weakening demand for steel and abundant supplies of iron ore dent chances of a hefty price rise in 2009.
The negotations are likely to be acrimonious and fiercely contested, analysts say, as steelmakers could ask for a price decline while producers will push to achieve a sizeable hike.
Australian miners achieved an almost doubling of the price of iron ore in 2007/2008 contract talks as steelmakers needed the scarce raw material to meet demand from emerging countries, particularly China, the biggest consumer.
But this is unlikely to be repeated next year due to the gloomy economic outlook while the market will slowly move away from benchmark pricing, analysts say.
Both Australian and Brazilian ore prices are expected to remain flat in the 2009 annual contract talks, the median forecast of a Reuters survey of 15 analysts showed on Wednesday.
“Because of the weak steel industry, it is very difficult to push through for a price increase at the moment,” said Nick Hatch, head of research, metals and mining at ING.
“With the economic slowdown and demand into China also seems to be slowing, there is certainly more chance of prices falling than increasing next year,” he added.
The world’s largest steelmaker ArcelorMittal was one of the first to announce plans for a 15 percent cutback while Russia’s biggest steelmaker Severstal followed suit. Europe’s second largest producer Corus also signalled that it will match weaker demand.
Sluggish demand and abundant supplies have brought Chinese mills to their knees, too. Four big Chinese steelmakers agreed to slash production by 20 percent last week.
The grim demand situation was reflected in the spot market, with the price of Indian iron ore sold on the spot market in China tumbling to around $95-100 a tonne CFR (cost and freight), from up to $200 a tonne in March.
“Spot price usually sets the tone for benchmark price negotiation,” Societe Generale said in its quarterly research note. “With spot prices trading at a discount to Brazilian and Australian iron ore the risk is clearly on the downside for next year.”
Steel mills in China asked Australia’s Mount Gibson Iron Ltd to delay some iron ore shipments last week — a strong indication of China’s fading demand. Freight rates tumbled.
“This was the first year in many, where the supply growth exceeded demand and that’s why the spot prices sank,” analyst Jim Lennon at Macquarie Bank said.
Analysts remained divided whether Asian customers will agree on a mid-year price hike request from Brazil’s Vale in such a demand environment.
Chinese customers slammed Vale’s request for an extra 12-13 percent price hike to bring its FOB prices in line with those paid by European steel mills, threatening to stop buying from the miner.
The freight differential between Brazilian and Australian iron ore has led to a rare divergence in the benchmark price and escalated discussions on alternative pricing mechanisms to the traditional benchmark system.
Rio Tinto said it stopped doing new long-term traditional contracts and was going to be selling more to the spot market while BHP Billiton, a supporter of index-based pricing, said it started using the new over-the-counter market for spot iron ore.
“With three competing iron ore indices now public (Metals Bulletin, Platts & SSB) and two major global investment banks announcing paper trading for iron ore, the pricing of iron ore tonnes will radically change over the next two years,” analysts ar Merrill Lynch said in a research note.
Credit Suisse and Deutsche Bank have launched an OTC market for spot iron ore in May.
“I don’t think the benchmark system will die completely, but we will move towards an index-pricing system fairly quickly,” Lennon at Macquarie Bank said.
Additional reporting by Nicholas Trevethan