Commodities | Nov 23 2006
By Rudi Filapek-Vandyck
What a difference five months can make. Back in June when the Chinese steel mills finally accepted a 19% price increase for their iron ore fine supplies few analysts thought producers Companhia Vale do Rio Doce (CVRD), BHP Billiton (BHP) and Rio Tinto (RIO) would be able to negotiate a further price increase for the coming year.
That view has changed dramatically over the past two months with most securities analysts now counting on a moderate (between 5 to 12.5%) price increase from next year April onwards.
But maybe the biggest shift in overall sentiment is that, contrary to a few months ago, even the Chinese now seem to be taking into account that a further price rise is likely. While listening to industry feedback, and reading expert reports, FNArena finds one message increasingly stands out: even the Chinese are accepting further price rises seem logical.
If this is the starting point for the new annual contract negotiations then surely the question must be asked: is iron ore again ready to surprise?
Similar to most previous years, Brazil’s market leader CVRD has again taken the leading role going into the 2007 contract negotiations with the industry’s major customers. An interview with one of the CVRD directors revealed the world’s main producer of iron ore pellets is starting off with a proposed price increase for fines of circa 40%.
While the number itself could easily be dismissed as “negotiation tactics”, after all the highest estimate we’ve seen thus far in the market is Morgan Stanley’s estimated 15% price increase, the remarkable thing about the interview was that it was first published via a Chinese steel industry website.
FNArena’s own industry feedback seems to confirm the Chinese steel manufacturers have already accepted that prices for iron ore fines and pellets are likely to go up again.
A similar picture emerged at a recent five-day tour through China with some 30 fund managers organised by Macquarie. Reports the broker: “Speakers at the Macquarie China Commodities Conference suggested that a price increase of 5–10% for 2007 iron ore contracts was likely (“If this is the opening gambit, then surely much more is possible,” was the general observation of many delegates).
GSJB Were analysts picked up a similar sentiment when touring through China recently.
Iron ore is expected to be the second largest source of earnings for BHP Billiton and Rio Tinto in the coming years. Copper is the numero uno.