The high iron and coal prices might be great for the likes of BHP Billiton and Rio Tinto (see above for Rio’s big 2010 result), but they are starting to reshape the steel industry, and the big suppliers had better take notice.
A combination of still strong demand from China, faltering supply from India, a fall in exports from Brazil (down nearly 30%, and an 11% fall from Port Headland in Australia last month) is responsible for keeping spot iron ore prices around $US183 a tonne (including freight), which close to all time highs.
Coking coal prices are back over $US250 a tonne in spot deals because of the floods in Queensland and Indonesia.
Current quarterly contract prices for both are up on the December quarter, and will be higher in the June quarter because of the floods and shortages of iron ore.
These prices are squeezing down on steelmakers and they have struggled to pass on these rising costs to consumers, especially in the US, Europe and Japan.
Iron ore costs are up more than 70% from the first quarter of 2010 and coking coal prices have jumped 40%, (thanks to the impact of the Queensland floods of the last four months).
This week Arcelor Mittal, the world’s biggest steel producer reported a 4th quarter loss, blaming higher raw material prices, and said it would go deeper into producing its own raw materials to try and lessen the impact.
Other steel companies are reporting similar pressures, especially in Japan and China.
So it comes as no surprise that less than a year after BHP Billiton and Rio Tinto struck opposition from steelmakers over the proposal to create a joint venture of their iron ore businesses in Western Australia, a giant merger has emerged in the Japanese steel industry.
Nippon Steel- Sumitomo Metal proposed merging last week to produce the biggest steel group in Japan and the second largest in the world.
These two companies would control 44% of Japanese steel production, more if Kobe Steel which is tipped to spin off its steel making business decides to merge it into the new Nippon Steel-Sumitomo group.
That would dominate the Japanese steel industry, reducing the number of major producers to three or four.
The new group would dominate certain product areas, adding to pressure on Japanese and other regulators to force some divestiture of product lines.
It will place pressure on the fragmented Chinese steel industry, the world’s biggest, to start merging to not only get economies of scale, but to get big enough to match the three giant iron ore companies in BHP, Rio and Vale of Brazil.
The merger in Japan is a major change in strategy and will see other steelmakers merge to match the strength of the world’s biggest group, Arcelor Mittal and the new Nippon Steel-led combination.
But even Arcelor Mittal’s, formed out of a series of mergers involving Mittal of India, Arcelor of Europe and steelmaking firms in the US, Asia and elsewhere in Europe, has not been enough to protect it from the rising cost of iron ore and coal.
Arcelor Mittal posted a net loss of $US780 million in the December 2010 quarter, down sharply from the profit of $US1.1 billion a year earlier. (It still earned a profit in all of 2010, but the dip into a loss in the December quarter was a crunch).
So watch for more mergers by producers as they seek to get to a size than can start matching the strength of BHP, Vale and Rio.
But that will be a while coming.
The shortage of iron ore is being driven by a fall in exports from India (not the negotiating power of the big three ore producers alone).
The Indian shortage is being driven by domestic politics and restrictions on mining areas occupied by poor farmers in the major producing states, and the growing demand from India’s own emerging steel industry.
Despite the loss Arcelor Mittal reckons its prospects are improving, with profits forecast for the current quarter and the rest of 2011. The reason, higher steel sales and prices: that’s if the recovery in economic conditions continues and isn’t derailed.
Arcelor’s optimism stands in contrast to the growing pessimism in Japan where Nippon Steel, the country’s biggest producer, cut its March 31 profit estimate last month.
The Japanese steelmaker revised its consolidated ordinary profit forecast to ¥220 billion ($US2.7 billion) from ¥250 billion and its non-consolidated ordinary profit to ¥80 billion from ¥100 billion.
“This revision reflects the current business conditions and uncertain elements, including the market trend for steel materials and other factors that could affect raw material prices,” Nippon Steel said in its profit statement.
In South Korea Posco, the world’s 4th biggest producer, saw a sharper than expected fall in 4th quarter earnings and US Steel had its 8th straight quarterly loss in the three months to December.
There is a feeling that the current surge in iron ore and coal prices will peak in the June quarter, but a year ago they were forecasting a similar result, and then the floods and heavy rain appeared in Queensland, Brazil and Indonesia, plus smaller events in South Africa and set p
