Chinese Steelmakers Squeezed as ArcelorMittal, Posco Revive

Jan. 25 (Bloomberg) -- Chinese steelmakers, the world's largest buyers of iron ore, face escalating costs for the steelmaking ingredient as global rivals ArcelorMittal and Posco increase output to feed resurgent demand in developed economies.

Contract prices may climb 31 percent to the second-highest on record for the year starting April 1, according to the mean estimate of 17 analysts surveyed by Bloomberg. That compares with the 14 percent gain forecast in October. Nomura Inc. and Bank of America Merrill Lynch expect a 50 percent jump.

The demand revival will benefit BHP Billiton Ltd., Rio Tinto Group and Vale SA, the three largest suppliers of iron ore. The global recession forced miners to slash prices by 33 percent in 2009, the first reduction in seven years.

"The big mills in China have been driving the price, but now capacity outside China is picking up," Colin Hamilton, a Macquarie Securities Group analyst in London, said by phone. "There is pressure on producers to deliver into Europe and elsewhere, which is exacerbating the tightness."

ArcelorMittal, the world's biggest steelmaker, is raising production as Posco predicts global steel demand will rise 10 percent this year. Supply concern has prompted "panic buying" of iron ore by the Chinese, Goldman Sachs JBWere Pty. said this month, as prices of ore for immediate delivery jumped to a 13- month high.

Iron ore demand from China, led by Baosteel Group Corp., may rise 6.2 percent this year, while purchases in the rest of the world may surge 16 percent, Morgan Stanley's chief metals economist Peter Richardson forecast this month.

Global Recovery

"The global recovery, excluding China, may add 100 million tons of crude steel output this year," Xu Xiangchun, chief analyst with Mysteel Research Institute in Beijing, said. "Iron ore price negotiations will probably be concluded quickly because the situation is very clear that prices must rise."

Iron ore for immediate delivery into China surged to a 13- month high of $131.20 a metric ton on Jan. 8, according to The Steel Index. Japanese steelmakers agreed to contract prices of about $61 a ton, excluding freight, in 2009. The Chinese increased purchases on the cash spot ore market after rejecting the 33 percent cut for contract delivery as too small.

A Chinese agreement may be possible this year as the steelmakers "are under pressure because the alternative is to not agree to a higher contract price and to align themselves with spot, which is currently much higher," said Daniel Fairclough, an analyst at ICAP Equities in London.

Chinese iron ore imports will climb to 667 million tons this year, from a record 628 million tons in 2009, according to Morgan Stanley. Consumption outside of China will leap to 329 million tons from 283 million tons, the brokerage said.

Demand Revival

BHP, Rio and Vale gets about $44.3 billion in combined annual sales from iron ore, according to data for the latest available period compiled by Bloomberg.

London-based Rio, the second-largest supplier, said demand is recovering after reporting a 49 percent jump in fourth- quarter output on Jan. 14. Recovery in markets outside of China may tighten supplies, Vale, the largest producer, said Jan. 19.

ArcelorMittal said in October the rebound in steel demand will push capacity usage in the fourth quarter to about 70 percent, from 61 percent in the previous quarter. The Luxembourg-based company may swing to a $3.8 billion profit this year from a forecast $389 million loss in 2009, while Japan's Nippon Steel Corp., the second-largest steelmaker, may post an 11-fold gain, according to estimates compiled by Bloomberg.

South Korea's Posco, Asia's most profitable mill, said Jan. 14 it will raise output by 17 percent this year.

Japanese Steel

Crude steel output in Japan, the world's second-biggest producer, may reach 105 million tons for the year starting April 1, UBS AG's Atsushi Yamaguchi wrote Jan. 13. That's 8.2 percent higher than the 97 million tons estimated for the previous year.

A shortage of steel may help U.S. Steel Corp., the largest American producer, raise prices, JPMorgan Chase & Co. said in a Jan. 7 report. Consumption in the U.S., Europe and Japan may surge by between 12.4 percent and 19 percent in 2010, the World Steel Association forecast Oct. 12.

"Japan will probably outpace Europe in demand recovery this year," said Geoffrey Cheng, a Hong Kong-based analyst with Daiwa Securities Group Inc. "Global steel output may return to the levels before 2009, while iron ore suppliers have been expanding."

Vale expects to reach a price settlement with the Chinese this year, Jose Carlos Martins, its ferrous minerals director, said Jan. 19. Japanese steelmakers may agree prices first, Mysteel's Xu said.

The failure of Chinese talks last year were followed by the arrest of four Rio executives in China in August on allegations of bribery and commercial secrets theft from the steel industry.

Rio and Baosteel, China's largest mill, both changed iron ore price negotiators this year, starting talks on a fresh slate.

"People are optimistic there'll be a contract agreement this year, and some believe it may be a quick deal," Macquarie's Hamilton said. "There is an incentive on the part of the big mills like Baosteel to negotiate a benchmark, because they like certainty."