Steel spat may push up product prices

Stephen Beard Apr 2, 2010

Steel spat may push up product prices

Stephen Beard Apr 2, 2010


Kai Ryssdal: Here comes the “rain on your parade” portion of today’s broadcast. A deal between iron ore producers and steel makers over in Japan has some analysts a little worried.

Here to explain is our European correspondent Stephen Beard. Hello, Stephen.

Stephen Beard: Hello Kai.

Ryssdal: So what exactly has happened with iron ore contracts?

Beard: Well, this week the mining industry abandoned a 40-year-old custom and switched from negotiating annual contracts to supply iron ore to their customers to signing quarterly deals. This means the price of iron ore is going to be a lot more volatile. It’s going to be related to the current market, the spot price of the metal, and that means that the price that steel makers will pay will vary sometimes quite quickly, from one quarter to the next.

Ryssdal: By how much do you think?

Beard: Well, it can be quite a lot. I mean, what we saw this week was the price absolutely shot up, because the demand for iron ore is quite high at the moment, the market’s tight — largely because of Chinese demand — the spot market price of iron ore is roughly double what the old annual price was. So that meant steel makers were suddenly paying double, about $120 a ton.

Ryssdal: Double can’t possibly be good. I’m just thinking of, say, cars, things that use a lot of steel, right?

Beard: Absolutely. Iron ore is the major component of steel, and steel, as we know, is a major commodity in a whole range of things — construction, you mentioned automobiles, white goods, domestic appliances. This does suggest that we’re going to see some quite hefty price rises as a result of this. Not perhaps so high in the U.S., because interestingly, the U.S. tends to recycle more of its steel than other steel-making countries. So, it’s less exposed to the iron ore price.

Ryssdal: But worldwide then, could prices ever come down? I mean, you know, a fool’s errand perhaps.

Beard: Oh, certainly, they could. And some analysts are saying that we could see the price of iron ore fall back quite sharply over the next few quarters. If that seems likely, the Chinese tighten credit to stop their economy from overheating, that could knock the price of iron ore quite sharply lower, and that would happen much more quickly than if this was an annual contract.

Ryssdal: One more thing about these pricing contracts going from quarterly to annually, it does open up iron ore contracts to this ability to trade the contracts themselves, right?

Beard: That’s very much so. And at the moment, there is a derivatives market in swap and options… but it’s relatively small, about $300 million. Not a great deal of volatility in the price, and therefore, not much of a percentage for the dealers. Now with these quarterly contracts, the systems likely to lead to much bigger swings in the price of iron ore, and so we’ve now got apparently banks and brokerages licking their lips over a potentially huge new derivatives market. Some say we can be talking about a market growing as big as $200 billion.

Ryssdal: Just what we need, more derivatives. Stephen Beard at the Marketplace European desk in London. Thank you Stephen.

Beard: OK Kai.

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