The cost of iron ore will rise next quarter by about 9 per cent as lower sales from India, one of the world’s biggest exporters, allows big miners including Vale of Brazil, Rio Tinto and BHP Billiton, to charge higher prices.
The cost of iron ore, used to make steel, is critical to the global economy as it filters into steel prices and, ultimately, into the cost of everyday goods. It is important for the profitability of the mining and steelmaking sectors, two of the world’s largest heavy industries.
The increase from January in the quarterly contract price would either push up steel prices or dent steelmakers’ profit margins, analysts and executives said.
The final price, to be announced on Wednesday, is expected to differ between miners due to the use of different formulas.
Vale’s and Rio Tinto’s quarterly contracts are based on a three-month average of spot quotations for the period ending one month before the new quarter. BHP Billiton uses other systems, including one- and two-month averages.
Excluding freight costs from Australia to China, the average iron ore price between September and November, the period used to calculate 2011 first quarter prices, was $140 a tonne, 8.9 per cent more than the $128.50 price fixed for the three months from October to December.
The spike comes on the back of tight supplies from India after a court upheld Karnataka state’s decision earlier this year to ban iron ore exports. The state, which accounts for about a quarter of India’s annual exports of more than 100m tonnes, prohibited the sale of the commodity amid a clampdown on illegal mining.
The ban has tightened supplies just as Asian steelmakers steep up their buying to build inventories ahead of the northern hemisphere winter. Meanwhile, some iron ore projects in Australia are facing delays, further tightening the market.
“I’m expecting iron ore prices will remain strong for at least another year,” said a senior mining executive, echoing a view widely held in the market. “The risk for prices is clearly tilted to the upside,” he added.
On Tuesday, benchmark spot iron ore – with a 62 per cent iron content – rose to $167.80 a tonne, the highest since May. Prices have risen 40 per cent from the year’s low of $117.6 in mid-July. The price change for the three-month period starting in January is the latest under the new quarterly pricing system linked to the spot market. The scheme replaced the 40-year-old benchmark system of annual contracts and price negotiations in April, when prices surged by a record 95-105 per cent. Prices rose by a further 20-30 per cent in July, but fell by 10-15 per cent in October.
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