Chinese Steel Price to Rise in Wake of Coal and Iron Price Hike

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What a spectacle in the energy and resource markets. The deep-freeze in the iron ore negotiations between Aussie producers and Chinese steel makers appears to be thawing. Yesterday’s Financial Review reports that the number we’ve all been waiting for here is: eighty five.

That’s the percentage increase in the annual iron ore contract price Aussie producers charge major Chinese steel makers. It includes the much sought after “freight premium” which recognizes that it’s cheaper to ship ore from Australia to China than from Brazil to China.

So what does it mean? Well, Chinese producer were hoping to NOT have pricing power in the ore industry lie with suppliers. But that hope seems to have faltered. Time for plan B. Plan B is to take equity stakes in a large number of smaller Aussie iron ore, and don’t discount the possibility of China Inc. taking a large stake in BHP a la Chinalco in Rio Tinto).

Plan B also includes raising steel prices. Granted, as you can see from the chart below, courtesy of Macquarie Research, steel prices are already up 65% this year alone. But as you can also see, Chinese steel prices trade at about a US$400 discount to U.S. and world export steel prices. Whether this is how the Chinese subsidise domestic steel consumption or not, we can’t really say.

But we can say that Chinese producers will increase exports this year and raise prices. Prices for domestic steel in China might differ from export prices. Who knows? But either way, you can be sure the Chinese steel producers aren’t simply going to absorb the huge increases in coking coal and iron ore. Chinese steel is going to get more expensive, whomever the buyer is.

Steel Prices

Normally, you’d expect to see higher commodity prices curtail demand. But for both steel and oil (see below) you haven’t seen any evidence yet that higher prices are slowing down demand. In fact, as this second chart from Macquarie shows, Chinese steel production is slated to grow by 10% this year. It even looks like the double bottom in steel production growth rates is in. Is it the beginning of a new steel boom?

Steel Oil Prices

One company that hopes steel prices keep going up is Aquila Resources (ASX: AQA). The company told investors yesterday that it could produce about 25 million tonnes of iron ore per year from its ore bodies in the Pilbara… for the tidy sum of $4.1 billion.

Welcome to the iron ore boom, Aquila (a company which also has coal and manganese assets). The company’s announcement was a little like a new doctor in a small town hanging out his shingle right across from the old doctor. The company isn’t producing anything yet. But like the other ore hopefuls in the Pilbara, it believes that with a little capital and a little deep water port facility at Cape Preston, its pre-feasibility study indicates it would have a nice little business.

What is the difference between a shingle and a “for sale” sign?

Meanwhile, the original third wheel in the Pilbara, Fortescue Metals (ASX:FMG), begins loading its ore for shipment to China this week. It’s been a long time coming. But FMG’s business has opened the door in the Pilbara and the Mid West for a long roster of other, smaller ore producers. The good old days of just BHP and Rio are long gone.

Dan Denning
The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. And that, Dan, is why I insisted we bite the debt bullet a bite harder and buy a replacement fridge and dryer at the Christmas sales as the Old Faithfuls hit planned obsolescence with a vengeance.

    Those were the cheapest whitegoods we are likely to see again under any normal economic scenario. And under an abnormal economic scenario I will probably be too poor to buy what’s on offer anyway.

    And on the macro-level – why is steel demand holding up ? Because folk are still massively building up the capital goods that make consumer goods, like mills, smelters, power stations and transport.

    As in the gem I found the other day that the Russians alone are now embarked on an emergency programme to add 41 GW of electricty generation within three years – and Chinese turbine and boiler manufacturers are the ONLY ones saying they have a hope of meeting these timetables. There’s a lot of steel, copper and concrete in 41 GW of power stations. Roll on the supercycle.

    Reply
  2. I don’t think the Chinese gov’t has subsidise the industry. As a matter of fact, they are pushing up export taxes to reduce exports overseas.

    And like POSCO of Korea, they are having a HRC steel price of around US$700/tonne.

    Alex Tam
    May 8, 2008
    Reply
  3. Some prices I’m seeing from China are about $800-900/t HRC FOB. As Alex pointed out exports are being limited.

    Reply

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