London, 31 August 2010

The price of steelmaking commodities iron ore and coking coal will drop next quarter for the first time in a year as lower steel production forces global miners Vale of Brazil and UK-listed Rio Tinto and BHP Billiton, to offer discounts on their supply contracts.

The cost of iron ore and coking coal is key to the global economy as it affects steel prices and the cost of everyday goods. It is also crucial for the profitability of the mining and steelmaking sectors, two of the world’s largest heavy industries.

Mining executives and analysts estimate that iron ore prices for the fourth quarter will drop by 10-15 per cent and coking coal prices by 5-10 per cent. The falls will either push down steel prices or widen steelmakers’ profit margins.

BHP Billiton, the world’s largest miner, last week warned that a global surplus of steel would hit “near-term demand” for steelmaking commodities.

The drop in quarterly prices comes after iron-ore prices have more than doubled since last year, triggering protests from steelmakers. Even after the drop, iron-ore prices will be nearly 120 per cent above last year’s level.

“The margins that they [the miners] are making are just astounding,” said Daniel Brebner, commodities analyst at Deutsche Bank in London. “It’s not highway robbery but I’m sure for the steel mills that see these guys pulling it right out of the ground they’re probably very envious,” he said.

The price falls, which cover 2010’s final quarter, will be the first triggered by the new quarterly pricing system linked to the spot market. The scheme replaced the 40-year-old benchmark system of annual contracts and price negotiations in April, when prices surged by a record 95-105 per cent. In the third quarter, with steel production booming, prices jumped another 20-30 per cent.

The final price, to be announced on Tuesday, will differ between miners due to the use of different price formulas. Vale’s and Rio Tinto’s quarterly contracts are based on a three-month average of spot quotations for the period ending one month before the new quarter. BHP Billiton uses other systems, including one- and two-month averages.

Analysts think iron-ore prices, excluding freight, will drop from $147 to $130-$135 a tonne. Coking coal prices will fall from $225 to about $210 a tonne.

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