Global Investing

Nerves of steel as regulators probe iron ore

June 25, 2008

iron-ore-graphic.gifAre steel companies really hurting from huge rises in the price of raw materials like iron ore? The biggest miner BHP Billiton reckons they aren’t and hopes to sway anti-trust regulators who are reviewing its takeover bid for rival Rio Tinto.

Steel firms from China to Japan to Europe have cited rising raw material costs as they ramp up prices, with Germany’s Salzgitter the latest to push the blame upstream.

Rio Tinto agreed record prices rises with China’s Baosteel on Monday that nearly doubled the price of iron ore this year under long-term contracts and BHP may try to get even more .

Raw material costs, however, only make up about 30 percent of the price of hot rolled coil steel, a figure which has not changed much over the past seven years, BHP Billiton Chief Executive Marius Kloppers argued at a presentation on Tuesday.  kloppers.jpg 

During the same period, iron ore prices have jumped 382 percent, metallurgical coal is up 599 percent and manganese ore is 486 percent more expensive. Tightness in the steel market is to blame for steel prices that have more than tripled and have allowed steelmakers to pass on all the the raw material costs to consumers, Kloppers said.   

“It basically shows that the very high steel costs have been driven almost entirely, certainly in the majority, by constraints on steelmaking capacity, and not raw material
costs,” Kloppers said.  

iron-ore.jpgHe was floating an argument he hopes will win the day as BHP seeks competition approval for a marriage of Rio and BHP, the second and third biggest iron ore producers respectively, which will command over a third of the seaborne iron ore market.    

Steelmakers have vowed to oppose the all-share takeover offer worth $170 billion, while BHP argues that they are enjoying healthy margins despite the price rises in raw materials. Watch this space.

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