December 02, 2008
Escalating freight cost increase tensions for iron ore talks
China Business News cited Mr Luo Bingsheng deputy director of China Iron & Steel Association as saying surging freight cost could result in a lengthy tussle between Chinese steel mills and iron ore producers for the upcoming round of iron ore price negotiations.
Freight rates continue to hit new highs these days, which put the focus of the forthcoming ore talks on how to handle the shipping costs. Currently, China's long term iron ore contracts have been based on FOB price and leading steel mills have capped their freight cost with long term contract with shipping companies.
However, Rio Tinto and BHP Billiton both are very keen to push for a freight premium on top of their fob contract prices, given that the landed cost of their iron ore in Asia is significantly cheaper than those of Brazilian and Indian ores. One source tells that Australian ore is "a bargain at around USD 80 per tonne CFR China compared to Brazil's USD 130 per tonnes and India's inferior quality ore selling at USD 155 per tonnes.
Chinese mills are reluctant to sign CFR contracts with Australian miners, preferring to handle shipping costs on their own. Mr Luo argues that iron ore supply shortage looks set to mitigate considerably next year as suppliers intend to increase the output by 70 million tonnes while the buyers only require an increment of 50 million tonnes to 60 million tonnes.
Mr Yang Shicheng senior analyst with COSCO predicts that iron ore shipping market would maintain the strong momentum next year as a result of firm market fundamentals. Global shipping industry appears to be not ready yet for the superb prosperity cycle in bulk cargo trade and shipping demand across the world. Moreover, stronger RMB and skyrocketing oil price have also contributed to ballooning freight cost.
It is widely expected that benchmark ore prices would continue upward path for fiscal 2008 as a host of investment banks have revised upward their forecast. UBS has increased the estimate up to 25% rise Macquire looks for 17.5% or higher increase while Citi group caps their forecast in the range of 10% to 20%.
(Sourced from MySteel.net)
