News Room - Steel Industry

Posted on 09 Mar 2010

Steel group sees supply chain changes

The move from yearly contracts in iron ore and coal to spot prices is likely to spark a sweeping change in the supply chain for steel, a steel industry official said on Monday.

 

BHP announced on Monday that it had agreed most of its coking coal sales on for this year on short-term contracts and hoped to follow in iron ore.

 

"I think you have to have a radical new look at how the supply chain is ordered. How do you fairly share the pain and the good luck among the supply chain?" Ian Christmas, director general of the World Steel Association said.

 

He told the Reuters Global Mining and Steel Summit in London that a move by iron ore firms such as BHP Billiton to scrap benchmark contracts was short-sighted, but the steel and auto firms which traditionally use long-term contracts would have to adjust.

 

Auto firms typically place long-term steel orders when they launch a new model and steel firms prefer the stability of yearly contracts, he said. Stability also helps mining companies, which must plan massive long-term investment to build mines.

 

"I believe that the strategy of the iron ore companies to try to move to spot pricing is an extraordinary phenomenon for businesses which ultimately have to take a very long-term view about investment," he said.

 

"It's clear to me that the iron ore companies are in the business of short-term profit maximization ... but they may rue the day when the supply-demand balance changes, as it inevitably will."

 

Christmas knocked iron ore companies for what he termed their "signaling" intentions for strong iron ore price rises this year.

 

"This game whereby BHP Billiton, Rio and Vale all tell what their expectations are about the price, I find that pretty anti-competitive pricing behavior."

 

Brazil's Vale is the world's biggest iron ore producer.

 

Christmas also reiterated the opposition of the steel industry to the planned Australian iron ore joint venture between Rio and BHP, the world's second- and third-biggest iron ore miners, as further concentrating power in the hand of a handful of firms.

 

Analysts have expected European Union anti-trust officials to take a hard look at the venture, but Christmas warned that governments in Asia are also likely to raise concerns.

 

"Whilst the focus is on the EU, don't rule out the reaction in China, Japan and Korea ... they're even more affected by the joint venture than the Europeans. Don't dismiss the fact that the competition authorities in China may have something to say."

 

The World Steel Association represents about 180 steel producers which produce around 85 percent of the world's steel.