The China Iron and Steel Association told Interfax yesterday that the global iron ore market will be relatively balanced with only slightly tight supplies over the next year, while the market will be the main influencing factor for benchmark prices.
The major factors affecting future global iron ore prices include market factors, mainly how much iron ore is imported by China, and mining infrastructure problems, leading to reduced global output.
However, according to another CISA official, Luo Binsheng, cited in a report by state media Xinhua news agency, China's iron ore imports will only reach 367 million tons this year, lower than the 400 million-ton prediction from various overseas institutions, leading to oversupply in the international market. However, if international mining companies reduce production accordingly, there may be tight supply in the global market.
The Xinhua report also accused the top three international iron ore producers of intentionally reducing production, in a move designed to increase iron ore spot-prices for next year's price negotiations.
Baoshan Iron and Steel Group (Baosteel Group) negotiates on behalf of Chinese steel mills with major international iron ore suppliers for annual benchmark iron ore prices, and is set to continue in this role for 2008.
"Global iron ore reserves are monopolized by several major suppliers, including CVRD, BHP and Rio Tinto, with consuming steel mills dispersed all over the world," a CISA senior official, surnamed Chen, told Interfax. While he does not believe major suppliers are intentionally raising prices, suppliers and consumers should work together to arrive at suitable benchmark prices.
"Reasonable iron ore prices will be set at next year's benchmark iron ore negotiations, taking into consideration various factors, including demand, supply and freight costs. Moreover, both iron ore suppliers and consumers should strengthen long-term cooperation and common interests on an equal footing. Any profit-oriented moves from either side are shortsighted, as suppliers and consumers are mutually dependent on one another," Chen added.
However, a commodity analyst with Macquarie International Holdings Ltd., who wished to remain anonymous, did not believe that international iron ore suppliers have been intentionally raising prices. "Iron ore suppliers will certainly reduce production in the second half of the year, but this will be due to adverse weather conditions and expansion projects. As a result, we expect the benchmark iron ore price for 2008 to be 17.5 percent higher than this year, with the slightly tight iron ore supply remaining unchanged for the rest of this year," the analyst said.
"Although we still rely on market supply and demand as the major factor in determining iron ore prices, infrastructure construction problems will create a bottleneck and increase costs next year. After all, it takes years for iron ore suppliers to commission an iron ore mine or expand an iron ore project, construct or update rail connections between mines and the coast, and construct suitable sea berths," the analyst added.
"The CISA's 367-million ton prediction for China's annual iron ore imports has been calculated by simply doubling import figures for the first six months, and although China's iron ore imports in June fell to 26.9 million tons, their lowest level this year, iron ore prices remain at high levels, indicating that China's iron ore demand is anything but falling," he said.
In support of Macquarie's predictions, the investment bank Credit Suisse, recently corrected their iron ore price forecasts for next year, raising the increase from a previous 10 percent to as much as 25 percent. In addition, according to results from CitiGroup's latest iron ore price research, prices will rise least 20 percent over the next two years and could rise that amount next year alone.
However, this view is not held by domestic Chinese steel industry consultancy Mysteel, which believes that Chinese iron ore imports will slow over the next year, leading to global oversupply and reduced benchmark prices during the next round of negotiations.
The main reason behind this opinion is that an ever-increasing proportion of China's iron ore imports are driven by steel product exports, which China would like to see reduced. The Chinese government has recently imposed a number of restrictive policies on the steel industry in order to limit excessive steel exports, and adopted policies such as canceling export tax rebates on most steel products, imposing and increasing export taxes and phasing-out outdated capacity.
China's iron ore import growth surged 32.28 percent from 2004 to 2005, but growth fell to 18.56 percent between 2005 and 2006. China's iron ore imports in the first five months of this year increased 21.52 percent year-on-year, which saw the proportion of iron ore imports used to produce steel products for export increase alongside from 26.6 percent in 2006 to 32.2 percent, according to Mysteel.