Iron ore price cut may boost steel prices

Reuters | Tue, 26 May 2009 12:45
[miningmx.com] -- A one-third cut in iron ore prices agreed by the world's No. 2 miner and mill may have the opposite impact on steel product prices, buoyed by the removal of cost uncertainty and reluctance of Chinese peers to accept the deal.

Rio Tinto Ltd and its Japanese customers agreed to cut iron ore fines by 33 percent and lumps by 45 percent, the first price cut after six years of gains that saw prices rise nearly four-fold, and broadly in line with most expectations.

The long overdue deal after months of fraught negotiations may allow world No. 2 mill Nippon Steel and its peers to hold the line against further steel product price cuts with major customers such as Toyota Motor, supporting margins in one of the industries hardest hit by the recession.

At the same time, Chinese mills, which are holding out for a cut of at least 40 percent and facing heavy pressure from the government to rein in output, may curb production to boost steel prices and to win a steeper price cut in iron ore negotiations.

"Steel prices have bottomed out and the iron ore deal will take some pressure off steelmakers to cut prices further," said Kim Hyun-tae, a Hyundai Securities analyst.

"But prices won't be able to stage a strong recovery, given that it would take some time for overall demand to fully recover."

Fearing that miners might win a deal closer to their proposed 20 percent cut, analysts had expected Nippon Steel to make another price reduction of around 5,000 yen a tonne pending the result of iron ore negotiations, and POSCO to slash prices again in the third quarter to reflect falling raw material prices.

Nippon last month agreed on a smaller-than-expected cut of 10 percent, or 15,000 yen a tonne, with Toyota, while POSCO cut its domestic steel prices by up to 20 percent this month in its biggest such move ever.

"It (the Rio/Nippon deal) removes one of the overhangs on steel prices and gives cost support... The less-than-expected iron ore price drop would require a higher steel price rebound to be passed on," Goldman Sachs analyst Song Shen said.

Chinese steel prices have rebounded back above $500 a tonne -- still half last year's peak -- after falling steadily to a five-month low in April 2009 on hopes that Beijing's nearly $600 billion stimulus plan will help pull the world out of recession.

But analysts caution that hard evidence of that hoped-for end-user demand remains scarce, and any price recovery will depend on whether China shows disciplined output.

"The deal removed the last bit of uncertainty that has haunted steelmakers but steel market recovery depends heavily on China -- whether they continue to produce more steel and put pressure on prices again," said G.J. Kim, a Samsung Securities analyst.

Spurred by a clearer cost structure and increasing prospects of stabilising steel prices, Chinese mills, which are deep in the red because of crumbling steel prices, could rush to raise output again to cut losses if prices rebound, analysts said.

China is already the sole major global producer keeping output steady this year, when world production ex-China tumbled around 36 percent between January and April.

"Now we have to see whether the Chinese steel association can hold the fort or not. For steel makers, this cut (of 33 pct) will increase their costs and bring up steel prices. It might also push up spot iron ore prices," said a senior official at a mid-sized Chinese state steel maker.