Yahoo Finance - Steel Prices on the Rise
Iron ore hike to give steelmakers more pricing power

Reuters 5-17-2006 - By Steve James

A 19 percent increase in iron ore prices agreed to by leading German and Japanese steelmakers will give manufacturers new pricing power, analysts said on Wednesday.

"There will be a general tendency to accept higher prices," said Michael Locker of Locker Associates, a New York business consulting firm specializing in the steel industry.

"It's as tight as I've seen in a long time, so there is pricing power," analyst Michelle Applebaum said of the supply situation for flat-rolled and plate steel in North America.

"But the most likely outcome is that prices will rise slowly in the third and fourth quarters," she added.
"It's good for steelmakers now, but customers are building inventories again," said Charles Bradford, of Bradford Research/Soleil. "That's what led to difficulties in '04 (when prices soared). There will be a more gradual rise this time."

Earlier on Wednesday, Brazil's CVRD (RIO.N: Quote, Profile, Research)(VALE5.SA: Quote, Profile, Research), the world's leading producer of iron ore, said it concluded negotiations with Japanese steelmakers to raise the price of ore 19 percent. This matches an agreement Companhia Vale do Rio Doce (CVRD) struck with Germany's biggest steelmaker, ThyssenKrupp (TKAG.DE: Quote, Profile, Research), on Monday for iron ore.

CVRD also said that it would reduce the price for blast furnace iron pellets 3 percent for Japanese buyers. This was also agreed with ThyssenKrupp. This marks the second agreed increase in annual talks and usually means that other CVRD clients in Europe and Asia will follow suit.

Applebaum, who is based in Chicago, noted that most North American steel makers were not directly affected by an iron ore price rise because they use mostly pellets or scrap.

"For U.S. manufacturers, the cost will be down on the pellet price, but the global price of steel is determined as much offshore as onshore," she said, so U.S. steelmakers will benefit from the general rise in prices.

China is pushing through increases, as are the Japanese. "The beauty for the U.S. manufacturers is that there will be a drop in costs," said Applebaum.

With higher prices all around, companies like AK Steel (AKS.N: Quote, Profile, Research) and much of Mittal Steel's (MT.N: Quote, Profile, Research) U.S. operations would benefit greatly, she said, as would U.S. Steel (X.N: Quote, Profile, Research), which is self-sufficient in pellets.

Nucor (NUE.N: Quote, Profile, Research), Steel Dynamics (STLD.O: Quote, Profile, Research) and the mini-mills would be neutral, she said.

Applebaum said prices, which soared to over $700 per ton two years ago, had been around $550 since last November. "They have been flat but it is beginning to go up again," to $570 now and $610 for June.

"The pressure overseas is massive. China has raised prices from $350 to $600 per metric ton since January," she said. "That's why U.S. prices are beginning to go up. In the long-run they are synchronized."
But when prices went up too fast in 2004, customers hoarded steel, she said. "The steelmakers learned their lesson and realized that if the rise is slower, people don't hoard or order foreign steel.

"In exchange for more orderly price rises, customers will order what they need and not what they want," said Applebaum.
Locker said steel manufacturers will be squeezed on margins and they will use it as an excuse to push up prices. Even for companies like Mittal, which owns 70 percent of its own iron ore supply, there will be upward pressure on prices, not only for steel, but iron ore pellets too.

Bradford saw the price climbing, but gradually. "Don't forget these ore increases are retroactive to April or January, so the steel guys have already sold the steel and not paid (the new price) for the ore."

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