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A case of shock and ore

A case of shock and ore

A lot of attention has been focused these past few weeks on the high price of oil and the bargaining power of the countries that export it.

But there are signs of price pressure in another key commodity — iron ore. China’s Baosteel Group announced on Monday that it has agreed to nearly double the price it will pay Australian miner Rio Tinto for iron ore. Nippon Steel has followed with a similar agreement.

Steel makers and ore companies usually enter into such contracts once a year. It is a bit of a ritual, though one that has become more important over the past few years.

The sharp rise in the rates being quoted by the likes of Rio Tinto may seem surprising. But what has happened right now is merely a process of catching up. Spot steel prices in China were already far higher than contractual prices. Many Indian ore exporters sell in these spot markets to smaller Chinese steel companies which do not enter into high-profile annual contracts.

First, it shows that the balance of power is shifting to mining companies. It is thus no surprise that China and Japan vociferously opposed a bid by BHP Billiton to buy Rio Tinto in February, fearing that this merger would create a price-fixing monster. There were also news reports at that time that Baosteel was thinking on entering the fray in order to secure ore supplies. Access to mines is clearly going to be a big issue for the metals industry, a fact that many Indian companies have realized. The result is a quest to secure supplies by buying mines or mining rights.

Second, rising ore prices are likely to push up the price of finished steel in the year ahead. Steel is not as much a catalyst of inflation as oil is. But higher prices of this metal could upset the economics of several industries, from auto manufacturing to construction. Infrastructure projects, too, could get costlier.

The system of annual contracts between steel companies and iron ore miners seem to be under strain. Some analysts believe that it is time the world shifted to a more transparent and open system, where iron ore is sold in a modern spot market. But that would mean more volatile prices for steel makers. It will be a tough choice.

Do the new iron ore deals suggest that inflation will rise further? Write to us to views@livemint.com

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