Major global miners seek 50% hike in iron ore contract price; neutral

Event: Chinese media reported today that global miners have upped the ante in their upcoming negotiations with Chinese steel mills by seeking a 50% increase in the long-term contract iron ore price for 2010-11. Rio Tinto has asked for a 50% hike over the 2009 benchmark price, while BHP wants the ore that it supplies to some steel mills to be priced at spot rates. Vale, on the other hand, is keen on a flat 50% increase, based on the difference between the spot price and the 2009 benchmark price. Prices of ‘63.5% iron’ ore in China rose to an 18-month high of $142/t (including freight) on Monday, double the benchmark prices settled in 2009. In 2010, Chinese steel producers may increase prices by 25-30% in order to offset rapid rises in raw materials prices.

View: Previous negotiations revolved around a 30 - 40% increase, but given the recent hike in spot prices (see graph) the potential price level could rise even higher. Although we expect to see further growth in steel prices triggered by rapid growth of raw material costs, we think that this largely depends on supply/demand dynamics in 2010, and thus will not translate into extra benefits to non-integrated producers. That said, we assume that current trends primarily benefit Severstal, Evraz and Mechel.