Inflation Update: Baosteel Agrees To a 65% Price Increase for Iron Ore

Baosteel LogoIn 1962, a young John F. Kennedy, the newly elected President of the United States, took on “Big Steel” when the U.S. steelmakers, led by U.S. Steel, had the audacity to raise steel prices by $6 per ton, an action that constituted in Kennedy’s words “a wholly unjustifiable and irresponsible defiance of the public interest.”

Steel is no less important to China in 2008 as it was 45 years ago to a heavily industrial America. China has 500 million tons of steel capacity, one-third of the world’s total, and its steel industry is four times the size of the U.S. industry. China’s ability to make steel is dependent upon iron ore imports, which are expected to double over the next six years.

Due to a 65 percent price hike on iron ore agreed by Baosteel, China’s largest steelmaker, Baosteel is expected to raise the price of its steel by 10 percent, or a whopping 400 yuan per ton ( approximately $55.94 at today’s exchange rates)—almost ten times what President Kennedy considered intolerable for the U.S. economy. This increase comes on top of steel prices which have already increased substantially over the last several years.

As expected, Baosteel agreed last Friday to pay 65 percent more for iron ore to Brazil’s Cia Vale do Rio Doce (CVRD), for 12 months beginning April 1, 2008. The price is in line with the benchmark price agreed by Japanese and South Korean steel manufacturers.

China buys approximately 38 percent of its iron requirements from CVRD in Brazil and 28 percent from BHP and Rio Tinto in Australia. Baosteel has not yet agreed new pricing with the Australian producers and is still in negotiations with Rio Tinto about five ore categories and with BHP about two ore categories. “The ore talks are at a stalemate, as Rio Tinto and BHP are asking for high-sea transportation subsidies, while Baosteel is not in agreement,” said Gao Bo, an analyst at the Mysteel Web site.

Analysts said that the expected 10 percent steel price hike would add costs for other industries, such as auto, refrigerator and washing machine manufacturers, which are heavily reliant on steel as a raw material. Rising costs will eventually be passed on to consumers.

The bad news for inflation in China continues.

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