75px-SteelMill_interior[1] Domestic long and flat steel products will see substantial price increase at least for the next three months following an imminent shift in the annual iron ore contracts to quarterly pricing by the world’s top three iron ore mining companies.

The cost of iron ore – the major raw material for steel making – to Asian steelmakers could now rise 80% to 100%, or US$110 to US$120 per tonne, under the new pricing mechanism, said industry players.


This compared with US$60 per tonne, the settled iron ore price for 2009/2010 annual contracts.

Vale SA of Brazil, BHP Billiton and Rio Tinto Group have considerable bargaining clout, controlling two-thirds of the US$88bil global seaborne iron ore trade.

AmResearch, in its latest steel report, said regional export prices of semi-finished and finished steel products were already on an uptrend after the Chinese New Year break.

Some Malaysian steel millers have also resumed their export orders for billets to Asean region at US$450 per tonne last December. Billet prices have since rebounded by about 33% to US$600 per tonne currently.

Malaysian Iron and Steel Industry Federation (Misif) president Chow Chong Long told StarBiz there was a huge potential for local steel bar prices to trade above the current RM2,300 to RM2,400 per tonne level.

“Local steel millers, like their international counterparts, will be affected by the shorter term iron ore contracts. There is no choice but to pass the higher iron ore cost to our customers,” he added.

Chow said steel demand was also expected to accelerate in the coming months with rising orders from the Asean region, structurally weak US dollar and resurgence in domestic steel consumption.

Perwaja Holdings Bhd and Kinsteel Bhd chief executive officer Datuk Henry Pheng concurred that steel prices could experience substantial increases in the coming months.

In China, the current spot steel price had surged US$150 to US$155 per tonne compared with US$60 to US$80 per tonne last year, he said.

Pheng, however, was of the view that the new quarterly iron ore pricing mechanism had some advantages for local iron ore consumers like Perwaja and Kinsteel.

“While the traditional contracts stipulate a fixed rate annually, the quarterly pricing allows steel manufacturers like us to better manage our costs should there be drastic price adjustments during the year,” he added.

Pheng also said Kinsteel had not yet committed itself to the second-quarter 2010 iron ore contract.

Kinsteel, which has a three-month iron ore inventory, would not commit to the second-quarter iron ore contract, which was now 90% above the 2009 iron ore benchmark price of US$90 per tonne, said Maybank Investment Bank in its latest report.

“The management is evaluating to source local iron ore reserves in Kuantan, Trengganu and Kelantan, which could have more favourable pricing,” it added.

Malaysia is believed to have at least 50 million tonnes of iron ore reserves.

Maybank Investment Bank has also turned positive on Kinsteel as the company’s April-to-May billet deliveries had been sold forward at US$550 per tonne (versus US$600 per tonne currently), which already reflected the inflated iron ore costs.

On the overseas front, Arcellor Mittal, the world’s largest steelmaker, was reported as saying that its end-product prices would likely increase by 21% in the second quarter of this year.

source: TheStarBiz

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