Iron ore price negotiations - Prices may pick up in 2011.

Gulf Today reported that tight supply due to lower Indian exports and rising demand from top consumer China could push iron ore prices higher in 2011 after an expected decline in the Q4 of this year.

Top consumer China’s steel appetite is growing to build an economy that, despite cooling efforts by the government, continues to expand quickly as the country pushes further to modernizing its cities with more low cost housing projects.

Analysts said that China’s steel demand should rise further in 2011 from this year’s record projection of between 613 million and 625 million tonnes. That and tighter supplies out of India, itself consuming more steel as it grows should lift prices of the key steelmaking ingredient.

In India, an export ban in the southern Karnataka state would reduce supplies to international markets which some analysts say could spread to other states as the country, the world’s third largest iron ore supplier, keeps more resources for domestic use. Karnataka, which accounts for about a quarter of India’s iron ore shipments has banned 10 ports from exporting and stopped the transfer of iron ore to other ports for exports last month in a crackdown on illegal mining. The Indian government is also looking at more taxes to discourage iron ore exports, with some analysts saying it may raise duty on iron ore lumps further to 20%. India already lifted the tax on iron ore lumps to 15% from 10% in April and levied 5% duty on iron ore fines last December.

Mr Judy Zhu commodity analyst at Standard Chartered in Shanghai said that “The restocking demand from China is really picking up and supply is going to continue to be tight without the return of Indian exports, so iron ore prices should rise.”

He said that “Standard Chartered has forecast iron ore prices would jump to USD 200 per tonne over the next 12 months from just above USD 140 now as suppliers struggle to meet increasing demand after the 2008 global credit crunch halted or delayed major mining projects. There were also signs that steel production in the United States and Europe are ramping up after a seasonal lull in July and August.”

But before resuming another potential bull run, iron ore contract prices, which are based on how spot prices fared in the past 3 months may fall by up to 12% in the Q4 after steel supply outpaced seasonally weak demand.

Analysts said that iron ore prices may settle between USD 130 and USD 138 per tonne, on a landed China basis for the October to December period down from USD 147 in the Q3. Top iron ore miners Vale, BHP Billiton and Rio Tinto are in the midst of setting prices with steel mills for the next quarter. The quarter could see the first drop in prices since the big three shifted in April to a flexible quarterly pricing system from a decades old annual scheme.

Vale of Brazil said last week that it plans to cut ore prices by 10% from October following a decline in spot prices in China in the past months.

Mr James Wilson resource analyst at DJ Carmichael in Perth said that most of these miners, especially the Aussie guys, will still be making quite serious margins even if there was 10% decline in prices. It costs USD 30 or less a tonne for Australian miners to produce iron ore compared to around USD 100 for their Chinese counterparts.

Chinese traders said that miners may push for higher contract prices in January to March when they see iron ore and steel demand recovering as early as this month. Everyone is expecting demand to pick up in September and October and if steel prices move up quickly, I doubt whether the three iron ore suppliers will be willing to cut their prices by 10% and whether Chinese steel mills would accept whatever the iron ore giants’ request.

Source : steelguru.com