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Dramatic cost increases set to squeeze steel producers and steel users - 8 April 2010

Iron ore news dominated the steel markets over the last week. Two of the three large mining companies – Vale from Brazil, and Australia’s BHPBilliton - announced dramatically higher iron ore prices and introduced new quarterly iron ore contracts.

As a result, many steel producers are likely to pay 80-130% more for their raw materials in the April-June quarter of 2010. They have reacted with shock.

These trends have also had a knock-on effect on steel prices and left steel buyers very uncertain. Some have responded by buying smaller volumes, adopting a wait and see approach, fearing prices would collapse. Others have bought more, fearing prices would rise.

As the cost increases are the immediate cause of the higher finished prices, and the new April to June quarter iron ore prices are pegged to the average of spot prices in January to March, an immediate collapse in steel prices seems unlikely.

In fact, the opposite is likely, says Roger Manser, managing editor of Steel Business Briefing. “Firming demand from steel producers in China, Europe and Japan is likely to keep the iron ore market tight and prices high.” Temporary bottlenecks in the supply of raw materials could exacerbate the situation, he adds.

Steel prices have already risen in many cases by $150/t, scaring many buyers. As demand remains slow, the increases may take some months to take effect. Further increases in iron ore prices could squeeze producers if they cannot pass on the increases quite rapidly. But if they do pass them on, the margins for steel buyers will be depressed.


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