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December 22, 2009

Iron Ore Price Expected to Rise 20% in 2010

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It is showed from a survay of analysts that a key raw material for steelmakers – iron ore price, is expected to rise 20% next year as surging demand from China continues to drive the market, though the Chinese industry already is signaling a tough line in annual contract negotiations, a survey of analysts showed.

The annual contract price for iron ore fines, free on board, from Australia with a 62% ferrous content is forecast to rise to $71.89 a metric ton in 2010, compared with $60.14/ton this year, according to a Dow Jones Newswires poll of 12 analysts.

Higher iron ore prices point to higher costs for steelmakers. About 1.6 tons of iron ore is used to produce a ton of steel.

“While we expect some easing in Chinese import demand in the near term due to restarts of domestic Chinese iron ore production, the recovery in non-Chinese demand should be large enough to offset this,” Macquarie Research analyst Jim Lennon said in a note to clients on Dec. 15.

China is the world’s largest iron ore importer and consumer. Its demand for seaborne iron ore this year increased nearly 40% to 612 million metric tons, even as demand in the rest of the world tumbled 30%, Macquarie estimates. China’s demand should grow to 654 million tons next year, underpinning a 12.5% year-on-year rise in global demand to 1.01 billion tons.

Bulk commodities like iron ore are priced on annual contracts as well as traded on spot markets. Brazil’s Vale SA, and Anglo-Australian Rio Tinto PLC and BHP Billiton Ltd. account for almost 70% of the seaborne market and one of the miners generally leads contract talks with steelmakers.

The 2009 annual contract price fell 33% compared with 2008. Spot iron ore prices peaked at slightly more than $200/ton in March 2008 after falling as low as $59.10/ton in March 2009, according to the Steel Index’s iron ore fines index for 62% ferrous content with delivery to China, freight and insurance included.

Spot iron ore prices hit a 12-month high of $107.40/ton Friday and on Monday traded at $106.90/ton, according to the Steel Index. The spot iron ore price is 77.8% above the annual benchmark price struck between miners and Asian steelmakers outside China. Adjusting for freight and insurance, spot iron ore prices are 49% higher than the current benchmark price.

China’s steelmakers don’t appear ready to accept a sharp rise in prices. Early this year lead negotiators at the China Iron and Steel Association pushed for steeper discounts than afforded rivals in Japan, Korea and Taiwan, but never settled on a final contract for 2009. Instead China’s companies have been buying iron ore on spot markets or at provisional contract prices that are in line with the other settlements in Asia.

China has signaled a tough line for 2010.

It is said from Ma Guoqiang, general manager of Baoshan Iron and Steel Co. last week that because there was still pessimism over the financial situation for global steel firms this year, it was unlikely that iron ore prices would rise next year.