Iron ore analysis – price surge to impact western steel companies

Christian Georges of equities intermediary brokerage Olivetree Solutions cautions that “the coming weeks are set to be characterised by profit warnings at most western steel companies, triggering severe earning downgrades and a sharp sector de-rating. Mining companies such as BHP and Rio are about to impose 80% year-on-year price increases for annual iron ore contracts to those customers not prepared to accept paying spot prices. Such an increase reflects ongoing surging demand in China, allied to the need for miners to finance capacity expansion.

“Vale, the key Brazilian supplier to European mills, is applying a 40% price increase this month to be followed by another 40% in April. At the same time, Salzgitter (steel and technology corporation) is guiding for a double-digit pre-tax profit in 2010 instead of the $200-$400 million suggested by consensus. This implies that the cost of procuring ores and coal, which fell substantially in the previous year, is expected to rise again in 2010.”

Georges said that EU steel optimism is relying on the ability of producers to impose higher steel prices immediately and expectations of fast improving volume due to aggressive restocking. “Yet reports are still pointing to weak ongoing orders and customers are not prepared to accept much price inflation. Hence BMW’s indication at the Handelsblatt Stahlmarkt 2010 conference that it is not anticipating the kind of price increases for flat steel products that have been mooted in relation to current expectations.”

He summarised: “In 2008, the iron ore price surge was passed onto customers who were then enjoying a buoyant level of demand. Two years later, the situation has dramatically changed. Clients are struggling with low demand and are focused on cost reduction. The 80% iron ore price increase is seen as a catastrophe by us.”