Iron ore price hike will impact steel prices

Steel market analysts say the materials increase could impact U.S. and global steel prices.

By Dave Hannon -- Purchasing, 2/20/2008 9:47:00 AM

With Brazilian iron ore mining firm Vale agreeing to a 65% increase in iron ore prices with Japanese steelmakers, market experts say steel prices in Asia—and the U.S.--will see a major increase later this year.

Reuters reports that Chinese steelmaker Baoshan Iron and Steel (Baosteel) plans to increase steel prices by 10% in the second quarter, which could bring more steel price increases in the all-important Asian market.

Strong domestic demand in China will allow steelmakers to increase their product prices on the basis of rising production costs, without having to worry about whether high prices would dampen buying interest," said analyst Henry Liu at Macquarie Bank.

Bloomberg reports that ArcelorMittal, the world's largest steelmaker, said Feb. 5 it may raise some prices further this quarter depending on the outcome of iron-ore talks. And Purchasing.com recently reported that Nippon Steel recently said it was increasing flat-rolled steel prices prior to the iron ore contract.

But the increases in iron ore prices for Asian steelmakers could impact U.S. steel prices as well, which are already trending up in early 2008 (see chart). While U.S. steelmakers rely more on scrap metal and iron ore pellets rather than iron ore fines to make steel, there will certainly be some impact on U.S. steel prices. Market analyst Michelle Applebaum in Chicago projects that U.S. steel prices could go up as much as $29/ton due to iron ore price hikes.

“We expect to see U.S. steelmakers continue to exploit their advantage by raising prices up until the point just before imports are attracted in," Applebaum wrote in a recent note to clients.

UBS Investment Research analyst Timna Tanners said in a recent report that the 65% iron ore price increase was beyond UBS’ expected 55%. "We expect that higher costs will prop global steel prices higher in light of fairly tight global market conditions and limited Chinese exports," Tanners said in a client note.

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