Iron ore price shakeups ahead

In the final part of a series of exclusive outlooks for the global metals markets in 2010, MINING DAILY and IBISWorld examine the future of the iron ore sector.

In the final part of a series of exclusive outlooks for the global metals markets in 2010, MINING DAILY and IBISWorld examine the future of the iron ore sector.

The outlook for the iron ore industry will be heavily influenced by trends in steel demand and production, price negotiations with Japanese and Chinese steel producers, and the value of the Australian dollar.

Australia’s production and exports of iron ore are expected to continue rise during the outlook period.

By 2014-15, Australia’s iron ore production and exports are expected to be 540 million tonnes and 510 million tonnes, respectively.

After falling sharply in 2009-10 on the back of higher output and booming prices, the growth in real industry revenue is expected to edge down by about 1.3% in 2010-11, before recording increases over the remaining years to 2014-15.

As a result, industry revenue is expected to expand at an average annual rate of about 4.8% over the five years ending in 2014-15, with profit rising to a similar extent.

The industry’s benchmark pricing regime, under which contract prices for the year ahead are negotiated between the major miners and steel mills in the context of a more fixed agreement on volumes, is likely to come under continued pressure.

Benchmark pricing played a key role in mine development by providing some certainty over off take volumes and prices.

However, its value is being questioned by both miners and steel mills in the context of a more substantial spot market.

Replacement options include reliance on spot market pricing or, more likely, a move to six monthly price adjustments.

Paul Adams, from DJ Carmichaels, agreed with this, saying the market would probably not return to a benchmark system straightaway.

“There could some sort of pricing index instead, although a higher proportion of production will be sold through the spot market,” he told MINING DAILY.

“We don’t think that the benchmark system really has a future in its current form.”

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