Prices Surge for Iron Ore, Bituminous Coal

The surging prices of steel materials such as iron ore and bituminous coal surge have fueled worry over steel-driven inflation.

Steel is called “the industry staple” because of its use as a raw material in almost every industry. In particular, a surge in steel prices is likely to aggravate profits in many industries with high demand for steel such as shipbuilding, cars and construction.

Industry sources said yesterday that in negotiations with Brazilian mining company Vale on setting this year’s price for iron ore imports, Korean steelmaker POSCO tentatively agreed to buy iron ore from Vale at 100 to 105 U.S. dollars per ton in the second quarter, almost 90 percent higher than last year.

Vale is one of the world’s three largest iron ore producers.

The price is even higher than that of iron ore in 2008, when raw material prices skyrocketed. POSCO and Vale faced difficulty reaching an agreement, so they decided to apply the price to iron ore imported from April and calculate the bill after reaching a final agreement on the import price.

In the negotiations, Vale also asked POSCO to set the price of iron ore every three months instead of every year. Japanese steelmakers including Nippon Steel Corp. have accepted this request and agreed to set the import price of iron ore every three months.

Lee Seung-woo, an official at the Korean Knowledge Economy Ministry in charge of steel and chemicals, said, “If iron ore’s price is set every three months instead of every year, the price volatility of steel products will increase. Accordingly, relevant companies will face difficulty setting up long-term strategies of supply and demand.”

The price of bituminous coal, a major material used to produce steel, has also soared. POSCO recently reached an agreement with major suppliers to import hard coking coal, a kind of bituminous coal, at 200 dollars per ton, up 55 percent from last year.

The steel giant also agreed to negotiate the price every three months instead of every year. With the price of iron ore jumping, that of scrap iron has also increased around 46 percent from the previous year.

Korea’s steelmakers using scrap iron such as Hyundai Steel and Dongbu Steel have raised the price of relevant products such as reinforced steel bars and hot-rolled and cold-rolled steel plates.

Prices of iron ore and bituminous coal have soared since steel demand has rapidly grown across the world after the global economic crisis. Iron ore manufacturers, however, have not increased their production volume fast enough since many closed their businesses or reduced production in the wake of the economic crisis.

Such developments have aggravated the imbalance between supply and demand. China and India also contribute to the imbalance since they have bought a large quantity of steel.

The Korean steel industry, however, has paid attention to when and how much POSCO, which has set the price of domestic steel products, will raise the price of its products.

An industry source said, “POSCO is expected to increase the price of its products around 30 percent since it probably wants to restore its price level that was cut last year.”

Daeshin Securities steel analyst Mun Jeong-eop said, “Even if other conditions such as labor costs stay unchanged, POSCO needs to increase the price of its hot-rolled steel products more than 19 percent due to a surge in the price of iron ore.”

Many experts say shipbuilding will be hit hardest if iron ore-driven inflation is in full swing. Steel plates account for 20-30 percent of a shipbuilder’s cost structure and shipbuilding is mired in a slump.

tesomiom@donga.com sukim@donga.com