China’s Baosteel grabbed the iron bull by the horns and negotiated the price of iron ore for next year, settling with Brazil’s Cia. Vale do Rio Doce for a 9.5% price hike.
The Wall Street Journal (subscription required) reported that the agreement was speedy even for CVRD:
"We weren’t expecting to have it done that quick," said Fatima Cristina, a spokeswoman for CVRD. Baosteel couldn’t be reached for comment.
The quick negotiations are a drastic departure from last year, when China dillied and dallied for months and finally had to agree to a steep 19% hike in a controversial about-face that showed the market is still very much a sellers’ one and that even the largest steelmaking country in the world is at the mercy of the iron producers.
In 2005, Japanese negotiators brought in the largest increase in history at 72%.
Steelmakers are already under pressure from declining steel prices and rising iron prices and the latest hike is not going to do them much good. (For the record, iron only represents a portion of the cost of making steel.)
Still, higher prices translate to more pressure for smaller producers that operate on tighter margins. Baosteel, one of the top ten producers in the world, is big enough to weather the hike but smaller steelmills around the country will feel the pinch. For the industry and the government this is not necessarily a bad thing. Both want to eliminate the smaller, inefficient producers that add a lot of capacity to the market and cannot be trusted to be environmentally responsible.
The latest hike, higher than most industry watchers anticipated, may help streamline China’s steel industry into a more efficient one.