Although steel output is now recovering in other parts of the
world, Chinese demand for iron ore will remain the
foundation of bulk carrier demand for the foreseeable
future, writes Michael King.
The dry bulk market is underpinned by the steel industry.
Some 50% of all bulk cargoes shipped each year constitute raw
materials for the sector. Iron ore, the key ingredient in steel
production, represented 33% of total seaborne bulk trade in
2009, according to a spokesperson for Barry Rogliano Salles
(BRS). Demand for iron ore is also the principal driver of
Capesize freight rates, which in turn strongly influence rates for
the smaller classes of bulk carriers.
In the aftermath of the global financial crisis, the
unquenchable iron ore import needs of China’s steelmakers
saved bulk freight rates from a far more prolonged and damaging
crash than might otherwise have been expected. While crude
steel output fell last year in Europe (–24%), the Americas (30%)
and in Oceania (29%), Chinese steelmakers boosted output by
13.5%, compared with the 2.3% growth recorded the year
before. China now accounts for almost half of total world crude
steel output and production has been rising even further this
So how does this translate into seaborne iron ore demand?
According to a new report from Unctad titled Iron Ore Market
2009–2011, seaborne iron ore trade increased by 11% in 2009
to 895mt (million tonnes) with Chinese demand the key to
growth. “China is by far the largest importer and its imports
grew by a massive 41% in 2009 to reach 628mt which is 67% of
total world imports,” said the report. “Japan is the second
largest importer at 105mt, a decrease of 25%. European imports
(excluding the CIS countries), fell by 45% to 100mt,
corresponding to 9.9% of world imports.”
The iron ore export market is dominated by Australia and
Brazil, with India rapidly expanding in third place. Last year
Australia increased its exports to 360mt compared with 310mt
in 2008, while Brazil saw a decline of 20mt in the same period to
record total exports in 2009 of 260mt. India, meanwhile,
increased its exports from 100mt in 2008 to 115mt last year,
according to figures from BRS rounded up to the nearest 5mt.
According to Unctad, some 75mt of new iron ore mining
capacity started operation last year. “The total project pipeline
in May 2010 contains more than 685mt of new production
capacity due to come on stream between 2010 and 2012,” said
the report. “Of this total, around 270mt falls into the category
‘certain’, 145mt ‘probable’ and 270mt ‘possible’. 61% of the
projects labelled ‘certain’ are in Oceania, Latin America has 19%
and Africa 16%.
On the demand side China, as ever, will be critical. “China,
the largest buyer of iron ore, is urgently seeking new sources of
iron ore to reduce its dependence on traditional suppliers,” said
the BRS spokesperson. “As a result, we have seen a spate of
discussions with and investments by Chinese companies in
alternative supply sources. Africa has significant potential, with
deposits in Guinea, Mauritania and Senegal, although
development of these mines is relatively slow and involves
political risk. China has also explored new investments in
Russia, and with smaller independent suppliers in Australia.”
However, some analysts are bearish on short-term Chinese
demand. One reason for the diversification efforts of Chinese
investors is the deteriorating relationship between steelmakers
and the ‘Big 3’ global iron ore miners — Rio Tinto BHP Billiton
and Vale — which together supplied some 61% of seaborne
exports last year. Earlier this year the traditional annual
benchmark negotiation process and contracting system collapsed
under pressure from the Big 3. The benchmark system has been
replaced by quarterly semi-negotiated pricing across much of the
sector which Unctad claims has “brought uncertainty and
reduced transparency in the iron ore market” and “resulted in
price hikes in the second quarter of 2010 of around 100%
compared with the 2009 benchmark price”.
The impact of the new pricing system on freight rates has, so
far at least, been deflationary. As DCI went to press, the iron ore
market was tight but although spot prices fell in early summer in
line with steel prices, contract prices had remained relatively
high prompting greater use of stocks and domestic supplies by
The Baltic Dry Index hit 4209 points on 26 May, but by 2 July
had fallen almost 45% to reach 2280 points. The Baltic Cape
Index peaked at 5455 points on 2 June but had collapsed to just
2627 points on 2 July.
Cotzias Shipping said the downfall of the market was not
caused by the increasing number of newbuilding deliveries joining
the global fleet but by a lack of cargoes to fix, primarily because
inflationary iron ore prices had made it “wiser to consume
domestic produced iron ore rather than imported”.
Cotzias added: “Together with a softening in final product
steel prices this has led to the sharp drop in Cape daily earnings
with no immediate signs of any recovery”.
Although Unctad expects prices to soften as more supply
enters the market, the World Steel Association (worldsteel)
believes the surge in iron ore prices earlier in the year, which it
blames on the power of the ‘Big 3’ producers, not only threatens
freight rates but also the global economic recovery.
Ian Christmas, Director General, said the new contract
system had greatly increased iron price volatility and had had a
negative impact on the whole steel supply chain. “In light of the
already highly concentrated nature of the iron ore industry,
where only three companies (Vale, Rio Tinto and BHP Billiton)
control most of supplies, there is a clear case for the
competition authorities around the world to oppose any further
consolidation of business interests between the top three mining
“Competition authorities may also wish to consider whether
the current market concentration is in the interest of the users
of steel and society as a whole.”
However, despite the stand-off between the steel industry
and the Big 3, the outlook for iron ore seaborne demand still
remains positive as global steel output recovers. “There are
definite signs that steel production is picking up in the Western
world,” said the BRS spokesperson. “Steel production in the
European Union countries reached 57.8mt in the first four
months of 2010, compared with 39.9mt in the same period a
year earlier. Japan has seen an even greater improvement, at
35.5mt, against 23.1mt in 2009.”
Worldsteel reports that the 66 countries which provide input
for its statistics saw production climb over 29% year-on-year in
May to 124mt. World crude steel output in May 2010 was 9.8%
higher in than in May 2007, before the impact of the global
economic crisis was felt.
Worldsteel forecasts that steel use will rise by 10.7% to
1,241mt this year after contracting by 6.7% in 2009. In 2011
demand will grow by 5.3% to reach a historical high of 1,306mt.
The upshot for iron ore suppliers, according to figures from
Drewry, it that iron ore seaborne shipments will surge to
976.8mt in 2010 before climbing to 1098.9mt in 2011 and
1239.8mt in 2012.
New Brazilian mines reflect continued strong demand for iron ore
End of ‘benchmark’ pricing and plans for several new mines in
Brazil and elsewhere, reflect the fact that demand for iron ore,
notably by China, continues extremely strong, writes Patrick
The past few months have been momentous for iron ore.
The longstanding benchmark system, whereby representatives
from the world’s three leading ore exporters, BHP, Rio Tinto and
Vale, have for the past 40 years met with representatives of the
world’s leading steel companies to agree a price which would
remain in force for the next 12 months, collapsed early this year.
Prices will now be adjusted quarterly, the new rate to be
determined by the spot market price.
The main reason for the change has been the explosion in
steel production in China, which has resulted in demand for ore
to exceed supply.
Smaller steel companies without long term supply contracts
were forced to turn to the previously insignificant ‘spot’ market
for their needs, causing turmoil in markets.
The spot price has sometimes been twice that of the
benchmark price, leading the leading iron ore companies, under
pressure from shareholders to maximum short-term profits to
conclude that they too, should sell spot, even though this could
well prove prejudicial to them in the long term.
From now on, the price for the following three month period
will be determined by the average of the spot price during the
three months which ends two months before the new price
comes into force.
With demand from China strong at the beginning of the year,
the miners pushed through a 100% price rise in April. The new
price of $110 per tonne was an all-time record. It compared
with the $80 per tonne of 2008, when demand was at its peak,
and the $50 to which prices fell last year, when demand from
most consumers, apart from those in China, fell sharply.
Demand strengthened in the first three months of this year,
after the Chinese government decided to stimulate demand by
encouraging infrastructure projects.
With the spot high still well ahead of the long term price, it
was decided in May that the price should be raised a further
35% in July.
But with the Chinese economy threatening to get out of
control, the government there took measures to cool demand
by trying to discipline civil construction and infrastructure
projects, which caused the spot price to fall.
With spot prices weakening, the three month price will have
to be cut again at the next quarterly adjustment, to come into
force in October.
Following the sharp rise in April, steel companies raised
prices by up to a third and this increase is now working its way
through into higher prices for vehicles, consumer durables and
construction materials.
It has caused inflation to rise, provoking a chorus of
complaints, although Vale for one denies responsibility for the
increase in inflation.
Without the bargaining power of their larger rivals,
smaller steel companies who rely on the spot market for
their ore, have welcomed the fact that banks and other
financial institutions will now hedge their needs.
The banks are seizing the chance to make the large
profits they were denied when long term contracts
involving just two parties dominated.
The entry of the banks will mean consumers have to
pay more for steel than previously, while the banks
will have a juicy new source of income.
Although the miners say they are happy with the new
system, it has introduced a new element of instability.
The industry has to spend tens of billions of dollars on
costly expansions which take several years to complete, if future
needs are to be met.
The companies really need stability, but this is something of
the past.
Vale, which now produces more than 300mt (million tonnes)
of ore a year, plans to push up supply to 450mt by 2015 to meet
increased demand which it concludes is inevitable.
Vale and most of the world’s economists as well, reckon that
the Chinese government will continue to encourage the
economy to continue growing by 8–9% a year.
Work must be found for the tens of millions who will migrate
from the countryside to cities each year from now on, or
political disturbances might ensue.
Even now, Vale thinks that it could export 50–100mt more
ore than the 250mt it now does, were it available. The company
expects that twice as much ore will be moved around the world
in 15 years’ time as the current 700mt.
Vale plans to advance on two fronts. One is to produce
50mt more from its Carajas mines. The other is to open brandnew
mines and build all the ancillary logistics systems to allow
up to 50mt of ore to be shipped from large concessions it has
recently bought in Guinea, West Africa. The concession cost Vale
$2.5 billion and the infrastructure works will cost at least the
same again.
But as Vale’s sales will earn $40–45 billion this year,
compared with $23 billion in 2009, this is small beer.
No mine yet exists in Guinea, while the concession awarded
by an outgoing government is expected to be contested by
other players in the region, notably Rio Tinto. Getting the ore
to the coast in neighbouring Liberia, a 500km railway, as well as a
new port will have to be built.
This has caused many analysts to conclude that Vale’s plans
for Guinea are overly optimistic.
Vale says it will be exporting about 10mt from its new
acquisition by 2012, 50mt a few years later.
Vale has been frustrated by difficulties in obtaining the
planning and other authorizations it needs to open a brand new
mine in the Carajas complex, which is one reason it plans to
expand abroad. But will the situation in Africa be that much
One advantage of Africa is that it is nearer the key Asian
markets, destination for 70% of Vale’s ore, than Brazil itself.
Ore from Brazil is penalized by high freight rates which puts
the product at a disadvantage compared with that from Australia
or India when demand is high.
The fact that the iron content of Carajas ore is much higher
than almost any other allows it to command a premium,
however, which partly compensates.
Vale was already the largest exporter of Brazil’s iron ore ten
years ago, but there were several others at that time, some
owned by steel companies. Since then, all of them, apart from
BHP which is in a joint venture with Vale and Rio Tinto, which
has mines near the Parana river, have been bought by Vale, now
responsible for more than 80% of the ore exported from Brazil.
Vale also supplies ore to Brazilian steel companies, which
used to buy some from Vale’s competitors, but which now have
to pay whatever Vale demands.
The price is determined by the international rate, rather than
what it costs to get ore out of the ground and to mills.
Attracted by the huge profits on a product whose FOB (free
on board) price at ports is only about $30 a tonne, all Brazil’s
large steel companies, led by CSN and Usiminas, but also
including Gerdau and Arcelor-Mittal, are not only seeking to
become self sufficient in ore, but to export some as well. Just
two of them, CSN and Usiminas, expect to be shipping up to
40mt of ore in two or three years’ time.
Anglo American, previously disdainful of humble iron ore, is
opening a large new mine in Minas Gerais state and plans to
start exporting 12mt in 2012, most going to Bahrain.
The Votorantam group has sold reserves in Minas Gerais
state to the Chinese Honbridge company, while half a dozen
smaller mining companies, some from abroad, have started
developing reserves in Minas Gerais and neighbouring Bahia.
If all goes according to plan, Brazil could be exporting more
than 600mt of ore by 2020, twice the current amount.
Will there be demand for so much ore, and will BHP and Rio
Tinto also increase supply from Australia by a similar amount?
Will other players, notably Chinese and Indian, enlarge or open
mines in India and Africa?
There is plenty of ore in the ground around the world, and
the mark up between what it costs to get the commodity to a
port and what the steel companies pay for it, is now so
astronomical, that many new players are being attracted.
Abandoning the once orderly benchmark system seemed the
right thing to do in the heat of the moment early this year.
But it could well be that the big mining companies will regret
having lost control of the trade in a few years time when prices
start to fall, as they have often done in the past, but in future,
banks will be siphoning off huge profits.
If exports of iron ore have recovered in the past few months
as steel industries in traditional markets such as Europe, Latin
America and North America, start up again, while demand
remains buoyant in China, there is no sign so far of a recovery in
demand for pig iron, used mainly in electrically powered furnaces
and mixed with scrap iron and steel, coming back to life.
The leading market for Brazilian pig iron has been the United
States, and as recently as 2007, it was the US’s third most
important items imported from Brazil, in value at least. While
steel mills in Asia, Europe and Latin America, are starting up
again, the US is lagging behind.
India: world’s third-largest exporter of iron ore
Iron ore suppliers led principally by Vale
of Brazil and Anglo-Australian BHP
Billiton with the other constituent of
the triumvirate Rio Tinto staying
conservatively in the middle of the tug
of war between miners and users of
the mineral have forced fundamental
changes in the settlement of ore prices,
writes Kunal Bose in Bhubaneswar. What,
however, is to be said while the
decades old annual benchmark price
settlement got a burial much to the
displeasure of those steelmakers
supplying the metal to final consumers like auto and white goods
manufacturers on long-term contract basis, iron ore has thrown
up a number of pricing options. Incidentally, such options are in
vogue for many metals and minerals.
Two overriding factors for the demise of annual benchmark
price, as leading industry analyst R. K. Sharma says, are first, the
emergence of China as the single largest buyer of iron ore in the
world market and its desire, justifiably so, to have a much bigger
say in price fixing and secondly on many occasions spot prices
leaving benchmark rates way behind. No doubt the occurrence
of the latter gives miners a feeling of being short changed. In
replacing benchmark system with quarterly price fixing in order
to capture spot rates more faithfully, the miners took full
advantage of the clumsy Chinese bargaining moves during ore
price negotiations in the past three seasons and divisions in the
ranks of steelmakers in that country. Hadn’t the miners relished
the spectacle of Chinese steel groups making ore deals last year
ignoring the fiat of China Iron & Steel Association?
In the wake of arriving at the quarterly price effective July
onwards, the world has seen how much more complex
negotiations have become in the absence of a benchmark. The
fact that Vale, the world’s largest producer of iron ore, remains
firmly committed to quarterly movement while BHP, which made
common cause with the Brazilian company in dismantling
benchmark system, now is trying to move completely to the
spot market completely. Isn’t this an indication of BHP
philosophy that miners should not be expected to provide
stability in ore prices? The BHP message seems to be that at any
point the dynamics of demand and supply should be the price
But where does all this leave Rio? As Metal Bulletin reports
quoting analysts, “Rio is staying conservatively in the middle of
the pricing spectrum” and therefore, dragging the chain.
Steelmakers find comfort in the Rio flexibility in combining
features of old contracts with the quarterly price which came in
vogue in April. At the same time, not all yearly contracts have
run their course as yet. Notwithstanding their reservations
about annual benchmark, both BHP and Rio will honour all their
outstanding commitments to the earlier price regime.
India, the world’s third-largest exporter of ore after Australia
and Brazil, has always been selling almost everything in the world
market, the buyer mostly being China, on spot basis. Yet another
feature of India’s annual exports of around 110mt (million
tonnes), ore fines for which the domestic use is still insignificant
almost make up the whole. Indian steelmakers may continue to
shout from the rooftop demanding gradual phasing out of ore
exports for local value addition in future. But Indian mines
minister B.K. Handique says if the steel industry’s demand is
conceded then not only “thousands of jobs” in the country’s remote areas will
be lost, but accumulation of fines at mine sites will cause serious pollution
problem. The demand to ban exports of ore is unreasonable
since Indiansteelmakers have not made much
progress in building capacity for sintering of fines and making pellets.
Sharma says exports are coming to India’s rescue since over 56% of the
total ore production comes in the form of fines. Fines constitute around 90% of
the country’s ore exports. The Indian steel industry used to
feeding its blast furnaces with high quality lump ore has only
now started using some quantities of fines. Indian Bureau of
Mines says that mine-head stocks of fines are around 50mt and
lumps nearly 25mt. It will be a retrograde move for India to
either further raise export duty on ore or ban exports
altogether. In any case, the mines ministry remains firmly in
favour of exports.
Being a large volume exporter, it is “important for us to
watch how the ore pricing format gets settled from various
currents and cross-currents. But since China is the principal
destination of our exports, we are particularly watchful of that
country’s current preference for one month or provisional
pricing allowing them to switch to spot buying when prices in
that segment come at a discount to contract rates,” says an
Indian mining official. China has proved its capacity to move the
market more than once by first building large inventories of ore
and then cut down imports when steel mill demand is met by
drawing down stocks. This tactic came into play in June-July
moving the ore market to China’s advantage.
At the same time, Metal Bulletin points to a worst case
scenario where “Chinese customers that have spurned the safety
of contracts for cheaper spot material could find themselves
stuck in a rising spot market, inadvertently pushing up the
indices on which contract prices are based, locked in a
nightmare of price spiral.” The quarterly price, as it has evolved,
is index based and the index for a quarter is worked out on the
basis of spot prices in the preceding months. Wittingly or
unwittingly, China being the most significant buyer in the spot
market, its actions will have a decisive influence on quarterly
Many mills in Japan, Europe and South Korea continue to
supply steel on long-term contracts. For them any awkward
swings in prices of ore, the principal raw material for making
steel, will remain a cause of concern. Perhaps an effective way
to give protection to mills from such price volatility will be to
structure iron ore swap deals. What will be of relief for
Japanese steelmakers is that the trading house Mitsui has made a
swap deal with Credit Suisse which along with Deutsche Bank
has pioneered iron ore derivatives. Mitsui move is the first for
Japan and more and more such initiatives are to follow.
According to Credit Suisse, if iron ore travels the same path
as coal which got delinked from benchmark a long time ago, then
as much as 700mt could come under swap transactions. No
doubt some steelmakers will also turn to forward buying in the
freight market for cost reduction. Iron ore producers and
steelmakers across the globe will be engaged in a battle of wits
for some time to come.
Krishnapatnam Port — one of India’s largest iron ore ports
As India’s economy continues to grow, its maritime trade and its
percentage share in the world market are also growing at a rapid
pace. Leading the foray into international markets are the bulk
commodities and containerized trades. The unprecedented
growth triggered a demand for strategic port capacity. Such
capacity is expected to sustain trade at lower costs in the most
effective and efficient manner, thus increasing India’s share in
international markets.
Krishnapatnam Port Company Ltd. (KPCL) has thus emerged
as a dynamic new-generation world-class port located in the
east coast of India, 180km north of Chennai city in the Nellore
district of Andhra Pradesh. The location of the port has seen it
become a port of choice for international cargo originating from,
and destined for, southern and central India.
Krishnapatnam Port Company has won the mandate from the
government of Andhra Pradesh to develop the existing minor
port into a modern, deep water, high-productivity port, on a
BOST (build–operate-share-transfer) concession basis for 50
years. The port is being built in three phases and currently the
second phase of development is under way. The port has
numerous strengths like its area, location, weather and the
credentials of the CVR group that is promoting it; it will soon be
poised to become one of the biggest ports in the world.
  •   seven berths are operational with three more berths under construction;
  •   deep draught of 14.2 metres alongside the berth, which will be increased to 20 metres in 2011/12;
  •   all-weather port with night navigation and round-the-clock operations;
  •   huge back-up area of 6,500 acres for transit storage including a covered storage area of 1.5 million square feet;
  •   port-owned dedicated handling equipment, tugs, mooring launch, speed boats;
  •   seven shore cranes (four Liebherr, two Gottwald and one Sennebogen) with a capacity of 750tph [tonnes per hour] to 1,000tph per crane. Four more shore cranes are under procurement;
  •   strong three-tier security systems;
  •   integrated real-time control of cargo handling through automatic vehicle location system (AVLS) and enterprise port management system (EPMS);
  •   ability to handle all types of cargoes — iron ore, coal, coke, fertilizers, project cargo, raw sugar, edible oil, granite, quartz, rock phosphate and gypsum with a volume throughput of 16.1mt
    (million metric tonnes) of cargo from April 2009 to March 2010
    as compared with 8.2mt of cargo in its first year of operations
Krishnapatnam port has excellent connectivity by road and rail.
  •   road — 26km dedicated four-lane road from the port to National Highway 5 (Chennai–Kolkata highway); and
  •   rail — dedicated railway line from port to the Chennai– Kolkata main line is already operational along with cargo-wise dedicated inside port sidings. The second phase of rail connectivity consists of 91km of new rail line between Obulavaripalle in Cuddapah District and Krishnapatnam Port.  This rail line will reduce the distance between the port and the regions of eastern Karnataka and south Andhra Pradesh by 75km, leading to substantial freight savings and facilitating seamless movement for the cargo.
  •   strategically located port in terms of road/rail distances from iron ore-rich areas of India, viz. Hospet, Bellary and Sandur;
  •   deep draughts with the ability to handle Capesize and Panamax vessels leading to lower ocean freight;
  •   high load rates leading to faster turnaround of vessels and significant benefits in ocean freight;
  •   highest iron ore load rate of 60,021 tonnes/day using conventional handling systems;
  •   mechanized handling system with a load rate capacity of 120,000 tonnes/day to be commissioned by January 2011;
  •   dedicated iron ore railway sidings inside the port with wagon tippling system; and
  •   the port provides single window clearance system to the port users.
Though the port is in its initial years of
operations, it is already setting various
benchmarks, which are outlined below:
  •   handled a total of 2,500 trucks on a single day;
  •   achieved a loading rate of 60,021 tonnes in 24 hours for iron ore fines which is the highest in India using the conventional system;
  •   in a single day it handled 120,492 tonnes, a remarkable achievement amongst the ports in India; and
  •   it has achieved almost 100% growth rate in volume throughput by handling 16.1mt in FY09/10 vis-a-vis 8.2mt in FY08/09.
Krishnapatnam Port has completed financial closure for
Rs. 4,000-crore phase II development, which is under
construction. Phase II will involve construction of seven
additional berths and mechanized cargo handling system with 11
cargo-wise dedicated railway sidings inside the port. On
completion of Phase II, iron ore cargo will be handled through a
shiploader with a capacity of 5,000tph; two 110-tonne-capacity
wagon tipplers, which will give 30 tips per hour per tippler; and
two stacker/reclaimers with a capacity of 3,000/5,000tph. As a
result, the loading rates for iron ore vessels will be around
120,000 tonnes per day.
Krishnapatnam Port has just set sail and is already creating
ripples in shipping circles around the world. This has only been
possible due to its skill of building and operating the port to a
very high standard giving the great value to all its customers. Its
belief in innovating, improving and adapting to the needs of its
customers is the success formula in making it India’s biggest
multipurpose port with an infrastructure and logistic setup of
international calibre.
Krishnapatnam Port will have a final capacity of 200mt per
annum, with 42 berths, by 2015/16, making it one of the biggest
ports in the world and the largest port in India.