Awesome rise in ore prices

Steel yourself for more expensive cars and fridges. There is an excellent supply-demand story in today’s Times linked to the monopoly power of the major producers of iron ore. I hadn’t realised that iron ore prices are fixed on an annual basis, assuming that it was determined on a daily basis in the commodity markets. The rising price of iron ore will hit the world’s major steelmakers and the key question will be whether they can pass on some or all of the extra costs to their final consumers.

‘The price of cars, refrigerators and buildings will rise this year after steelmakers agreed a dramatic increase in the price of their raw materials.
The latest round of iron ore price negotiations produced its first agreement yesterday when Vale, the Brazilian miner, said that it would sell to Japanese and South Korean steelmakers for at least 65 per cent more than in 2007. Analysts estimate that this settlement, which will form a benchmark for all other talks, could lead to a 20 per cent rise in steel prices, which almost certainly will be passed on to consumers.

Prices for iron ore, the raw material for steel production, are set annually, with the world’s largest consumers agreeing contact costs with suppliers. Vale, Rio Tinto and BHP Billiton control 80 per cent of the iron ore market, but deny that they operate as a cartel. BHP is trying to buy Rio Tinto in a £75 billion deal, but the possibility of a merger of the two operations has raised competition concerns over the supply of iron ore. Other metals, such as copper, have their prices determined daily on the London Metal Exchange, but iron ore supply is controlled so tightly that the miners are able to negotiate prices with the biggest consumers only once a year. Vale, the world’s largest iron ore producer, with 38 per cent of global supply, has set the benchmark for the past six years.’

The full Times article is here and there is a good follow up article in today’s Financial Times.