Global Iron Ore Markets
Benchmark Prices Could Skyrocket in 2005
by Joseph Dancy, LSGI Advisors, Inc., Adjunct Professor, SMU School of Law. February 24, 2005
According to industry analysts China's steel sector has added the equivalent of the entire United States steel industry in the past three years. Since China became the largest steel consumer in the world in 1994, year after year it continues to break records in terms of steel consumption. Consumption increased 22% in 2003, and increased 13% or more in 2004. Many analysts see China's steel consumption growing 6% to 10% in 2005.
Last week Chinese authorities announced that this incredible growth continued with their economy expanding by 9.5% last year - much higher than many analysts expected. Most importantly, their economy finished the year in a particularly strong manner, accelerating to a growth rate of almost 13% in the last three months of the year.
These figures were also supported by data released last week on China's energy consumption. China, as the world's second-largest crude oil consumer, imported 31% more of the fuel in December than in the same month a year earlier. While economic growth might be slowing, the world's fastest growing major economy continues to see increased demand for gasoline, diesel, coal, zinc, limestone – and iron ore – creating opportunities for individual investors in the U.S.
China's Iron Ore Consumption
While China's domestic iron ore production capacity has expanded it has not kept pace with the demand generated from these new steel facilities. China purchases around one-third of the world's production of iron ore.
London shipbroker Simpson Spence & Young recently released an estimate of Chinese imports of iron ore in 2005, forecasting imports will expand by around 15%.
AME Mineral Economics, a mining economics consulting group, also released a study predicting Chinese iron ore imports this year would increase 20-25% to the 250 million metric tons range – up from 200-210 million metric tons in 2004 - and 150 million metric tons in 2003.
Other analysts are even more bullish: London-based shipbroker Howe Robinson expects Chinese iron ore imports to soar by 70 million metric tons in 2005 – a 35% increase - to support the country's expected raw steel production of 330 million metric tons.
Benchmark Iron Ore Prices Set to Rise
Once each year the major iron ore producers negotiate with their major steelmaking clients to set a price per ton to be paid for the ensuing year. Under this arrangement world iron ore prices increased 10% in 2003, then 18.6% more in 2004, as prices for iron ore are pushing highs not seen in a decade.
Brazil's Companhia Vale do Rio Doce, or CVRD, the world's biggest iron ore miner, has set the benchmark for global prices for the last two years in agreement with European steel manufacturing titan Arcelor.
Many expected CVRD to seek a 20% to 25% price increases on the 2005 supply contracts currently being negotiated, a very healthy gains considering pricing in the immediate past.
Surprised might not be the term to describe the reaction when CVRD began negotiations last month. They asked for a 90% price increase for the raw material in the year starting April 1st amid booming worldwide demand for steel used in the construction, homebuilding, and automotive industries. While the actual agreed to increase most likely will be below this level, the gain very well could be the largest increase in 25 years – and a much larger increase than expected.
"I don't think it's at the top of the cycle," said John Brinzo, the chairman and chief executive of Cleveland Cliffs, which has been mining iron ore from Michigan and other parts of North America since 1891. "I think it has got a good way to run and I'm not so sure we're going to see a traditional cycle in steel this time," he said. Brinzo's comments were made when Cleveland Cliffs announced the acquisition of an Australian mining company last month, an addition it hopes to utilize in meeting growing Chinese ore demand.
In addition to tight iron ore markets, China's growth has also created short supplies of alloys such as zinc, along with metallurgical coal used in the steelmaking process. All in all, a very positive environment for investors in the basic material sectors.
Pictures: Inland Steel's iron ore carrier Wilfred Sykes approaches the pier from Lake Michigan in Escanaba, Michigan [top], while Great Lake ore carriers Lee A. Tregurha [lower] wait to be loaded. Photos courtesy of Lee Rowe of Gwinn, Michigan - http://pasty.com/pcam/LRowe
© 2005 Joseph Dancy