China directs the breaking point of steel
By Malcolm Maiden
February 24, 2005
The only thing more astonishing than the iron ore price rise that Japan's steel mills have agreed to is the fact that they can absorb it.
The soaring iron ore price is becoming a political issue. China has been lobbying BHP Billiton, Rio Tinto and the Federal Government behind closed doors, and Japan's chief cabinet secretary, Hiroyuki Hosoda, yesterday said his Government was monitoring the rises, which would "significantly raise production costs in the steel industry".
But despite the complaints, Asia's steel makers are not about to plunge into bankruptcy. The iron ore price also rose 18 per cent last year, but it represents only 10 per cent of the current price the mills get for hot-rolled coil steel. Last year's coking coal price is another 7 per cent of the steel price, leaving plenty of room for profits. Nippon Steel, one of the two Japanese groups in the contract talks, expects to lift profit fivefold to a record in the year to March. The other steel maker involved in the talks, JFE, should double its profit.
The mills will try to pass on to steel customers as much as possible of this iron ore price rise and a previously negotiated 120 per cent rise in coking coal prices. But even if the mills totally absorb the increases, iron ore and coal will still represent only 17 per cent and 13 per cent of the current steel price respectively.
The explanation is that steel prices have also been soaring. In 1999-2000, rolled steel coil averaged $US239 a tonne, and in 2002-04 it was $US289. In 2003-04 it leapt to $US520 and is now fetching about $US550.
The steel makers have been able to get sharply higher prices because steel has been in great demand - in the US, in Asia, and particularly in China.
China sits at the centre of this process because it is also the price inflation circuit breaker. It has not been passing higher prices for commodities and raw materials into the goods it makes and exports - and competitors in other countries have had no choice but to follow. Whether that can continue in the face of the price rises now being posted is one of the great unanswered questions about this extraordinary commodity price boom.
The Maiden family owns BHP Billiton shares.
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