Steel prices set to soar

飞雪寒冰

Global steel prices are set to leap by up to a third, pushing up the cost of everyday goods from cars to domestic appliances, after miners and steelmakers yesterday agreed a ground-breaking change in the iron ore price system.

The deal by Vale of Brazil and Anglo-Australian BHP Billiton with Japanese and Chinese mills marks the end of the 40-year-old benchmark system of annual contracts and lengthy price negotiations. The industry instead agreed to move to quarterly contracts linked to the nascent iron ore spot market.

The world's top ore miners stand to profit hugely in the short term from the new price system. One executive estimated that the profits of the big three producers, Vale, Rio Tinto and BHP Billiton, would be boosted by at least $5bn this year.

The new system is a response to last year's stalemate in the negotiations between miners and Chinese steelmakers, when both sides were unable to reach an agreement on annual prices. The balance of pricing power has shifted in the miners' favour due to the emergence of China as a voracious consumer over the past 10 years.

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The steelmakers said they would compensate for the increase in raw materials costs by raising steel prices by up to a third. Some companies have already raised their prices in anticipation of the move in iron ore. The cost of the benchmark hot rolled coil steel is likely to hit $725-$750 a tonne by the end of next quarter, up from $550 in January. It traded as low as $380 a tonne last year.

“The impact of higher raw material prices will be passed to consumers,” said Thorsten Zimmermann, a steel analyst at HSBC in London.

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Leading Japanese steel mills, including Nippon Steel, and Chinese steelmakers, including Baosteel, had signed the new quarterly contracts, executives said. European steelmakers have yet to sign any new quarterly contracts. Rio Tinto has not announced a contract, but executives expect it to soon.

The European steel industry association, which represents some of the largest companies in the industry such as ArcelorMittal and Thyssenkrupp, warned that the increase in iron ore costs will “inevitably” have a “significant impact on prices through the whole value chain down to the end consumer”.