It used to be the case that minimills (scrap buyers) and integrated mills (iron ore buyers) had very different cost structures. Integrated steel producers’ costs were relatively fixed because iron ore and coking coal were sold on an annual contract basis and did not change much year to year. Scrap prices on the other hand, moved up and down with steel demand end helped minimills maintain their margins across the cycle. That was then and this is now.
The raw materials used to make steel are in short supply globally, causing much greater volatility in all raw material prices and different purchasing behavior by steel producers. From the few time series which are available to compare the two, scrap and pig iron prices track each other. See the chart below.
So it’s not really fair to fault EAF producers for reacting to iron ore price hikes or integrated producers for reacting to scrap price shifts. Iron is iron and, if priced efficiently, the two commodities will price an iron unit about the same. If you don’t believe iron is iron, check out the recent announcement that Nucor, the largest minimill in the country, plans to build a blast furnace to make the stuff.
And it’s the surcharge, another undoubted frustration for steel buyers (and producers), that has driven steel prices most. There are a number of different flavors of surcharge depending on the product you’re buying and who you’re buying from. But in all cases the surcharge mechanism is relatively transparent, at least enough to show how the supply/demand tensions of the raw material compare with the supply/demand tensions of the finished product.
To make that comparison, just take the calculated surcharge of hot roll sheet or plate from any of the US producers and subtract it from the Purchasing Magazine monthly spot price for those same commodities. You will see that after an initial run up in the base price (i.e. the price excluding the surcharge) in 2003/4, most of the price changes since then have come from the surcharge mechanism alone. It’s only in recent months that the supply/demand dynamics of the finished steel product markets have also started to put upward pressure on prices.
If you want to understand freight rates, you might first want to go to an industry overview provided by Genco Shipping and Trading Limited It includes a very good description of how different drybulk materials are shipped and what the rates you will find actually mean.
You can find current iron ore and coal freight rates on a webpage provided by metaljunction. By clicking on the world map freight route, and by “viewing the details”, you can in many cases get information on shipper, vessel name, tonnage, loading port, unloading port, etc.
Another site by the shipbroking group Simpson Spence and Young provides graphs of iron ore and coal freight rates for major world routes from January to December 2007
If you are trying to understand the historic freight differential between iron ore shipments from Brazil to China and Australia to China, see a BHP presentation from 2005, slide 15, which shows the differential from August 2001 to February 2005. Slide 16 then shows delivered costs of iron ore into China from February 2002 to December 2004.
Finally, as you probably know, there are two well-know indices of drybulk freight rates, one is from the Baltic Exchange, and the other is from JE Hyde. The Baltic indices are only available to Baltic Exchange subscribers, but you can get both the Baltic indices and the JE Hyde indices if you have a subscription to Metal Bulletin and click on the category “Maritime News”. If you don’t have Metal Bulletin access, you can read the JE Hyde indices levels in the banner on the JE Hyde home page.
There has been a recent flurry of steel producer acquisitions of scrap processors (SDI-Omnisource, Nucor- DJ Joseph, DJ Joseph-MRS, Galamba) and persistent rumors that others are circling targets. By my calculations steel producers now control about 40% of the US ferrous scrap industry. They controlled less than half that only a few years ago. If the experience of US integrated producers and the iron ore industry at the turn of the last century is anything to go by, there’s more to come.
This paper describes the process of vertical integration into iron ore production pursued by steel producers in the 1890’s. In 1896 65% of the total iron ore consumed in the US came from mines located in the Lake Superior region. There were more than 100 companies located in the region and they produced about 10MT tons of ore between them. But only one company, the Oliver Mining Company, was owned by a steel producer (Carnegie Steel).
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A good source of iron ore statistics are reports published by the UNCTAD secretariat (United Nations Conference on Trade and Development) in cooperation with the Raw Materials Group, based in Sweden. You can view all the available publications on the Raw Materials Group website, but you can read the full World Investment Report 2007 by downloading different chapters on the UNCTAD website. This report doesn’t provide all the iron ore statistics you may be looking for , but it does examine trends in commodity pricing and the future of the current “commodity price boom”.
CVRD, the largest producer of iron ore in the world, has just reached an agreement with some of the major Asian steel producers to increase 2008 benchmark iron ore prices by 65% to 71%. A typical integrated steel maker uses roughly 1.4 short tons of iron ore pellets to produce a short ton of hot rolled coil. So, a 65% increase in the price of ore translates into a $60 per ton increase in steel manufacturing costs.
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