Contracts signed with major steel mills in Japan and China by the world's largest iron ore suppliers have steel makers around the world crying foul.
"The ability of mining companies to impose this change, which maximizes their short-run profits, comes from the uncompetitive market for sea-borne iron ore," said Ian Christmas, director general of The World Steel Association, a group representing 180 global steel producers. "Just three companies dominate this business with the major Brazilian supplier having a virtual monopoly in the Atlantic basin and the two major Australian companies having a virtual monopoly in the Pacific basin."
Christmas also referenced a proposed joint venture between Rio Tinto and BHP Billiton to merge their western Australia mining operations and called for competition authorities around the world to investigate the market for iron ore as prices have spiked 90% after new quarterly pricing deals were announced.
Brazil's Vale SA said on April 1 that it reached quarterly pricing agreements with most of its customers after a similar deal was struck earlier by rival BHP Billiton Ltd. Vale, BHP Billiton and Rio Tinto Group control about two-thirds of the world's iron ore market. Rio Tinto has said it's considering a move to the quarterly pricing system. The new system replaces traditional annual benchmark pricing.
The European Confederation of Iron and Steel Industries (Eurofer) and European engineering association Orgalime also issued a statement asking European authorities to take action. The groups condemned the actions of the three major iron ore producers, saying the price increases will have a significant impact on the supply chain and jeopardize industrial recovery in Europe.
Euorfer and Orgalime have asked for immediate intervention by the European Commission and German federal cartel office "to tackle competition distortions in raw-material markets and to prevent speculation on raw materials in order to support the long-term future of the industrial value chain in Europe."
But IHS Global Insight Senior Steel Analyst John Anton says concerns over the price hikes are "overblown" and that the increases were already in progress before the pricing contracts were announced.
"Contrary to many news stories, the lack of annual contracts will not necessarily lead to higher annual prices, but will lead to far greater volatility and risk," wrote Anton. Mills will no longer be able to get an annual fixed price for ore. If mills cannot control the price of ore, they cannot guarantee a fixed price for steel. Mills fear this will always lead to higher prices, but buyers on a spot basis saw huge price cuts in the second half of 2008 and into 2009."
The contract prices are catching up to already-higher spot prices, Anton says. He expects contract pricing will have a minimal impact on price increases, noting that steel prices are already up approximately 30% in 2010, reflecting the high cost of spot ore and scrap steel.