Gains for US steel after ore price rise

Gains for US steel after ore price rise
By Telis Demos in New York and Jonathan Soble in Tokyo
Copyright The Financial Times Limited 2010
Published: April 2 2010 19:27 | Last updated: April 2 2010 19:27
http://www.ft.com/cms/s/0/fb58aef0-3e7e-11df-a706-00144feabdc0.html


US steel products are poised to become more attractive on the global market in the wake of the sharp rise in traded iron ore – a development that has enraged makers of the metal elsewhere in the world, analysts say.

Steel inputs in the US are in large part isolated from the global market because the US is the only steel-producing country that is a net exporter of the chief ingredients of steel, iron ore, coking coal and scrap.

“That gives the US a huge natural cost advantage,” said Michael Gambardella, basic materials analyst at JPMorgan. “The iron ore price movements are a benefit for domestic steelmakers.”

Posco, the world’s fourth-largest steelmaker, on Friday became the latest company to agree to buy ore based on quarterly contracts after miners convinced their largest customers in China and Japan to drop a 40-year-old annual pricing mechanism in favour of shorter-term deals based on the spot market.

With the contract price about half the spot market just now, the new system will see iron ore prices nearly double in the short-term and force steel prices up by as much as one-third.

Provisional agreement between Posco and Brazil’s Vale will see the South Korean company paying $100-$105 a tonne for iron ore from April to June – up to 86 per cent more than it paid in the past year.

Europe’s steel and motor industries have complained formally to Brussels about the new system, claiming that it has been imposed on the market by an oligopoly of miners.

Japanese steelmakers, who once dominated annual price negotiations, blamed competitors in China for accepting the new pricing system last week. China now makes five times as much steel as Japan.

“There is a concern that the shorter the pricing period gets, the more opportunity there is for speculation and volatility,” said a manager at one Japanese steelmaker.

In the US, the largest producers, US Steel and ArcelorMittal, are vertically integrated, owning their iron ore mines. A relatively high portion of steel in the US also is produced by mini-mills, such as those owned by Nucor and Steel Dynamics, which primarily consume scrap.

“US pricing is being driven by a bidding war for a limited supply of scrap,” said John Tumazos of Very Independent Research, an industry consultancy.

US prices rose to $650 per ton in March, their highest since 2008, in a survey by Purchasing magazine, an industry trade publication. Nearly all the 2010 increase was during the past month.

Rising iron ore prices may indirectly put more pressure on scrap prices and US steel prices, as global producers adapt their mix of inputs.

Additional reporting by Song Jung-a in Seoul