Chinese and Japanese steelmakers have demanded a record 40 per cent cut in iron ore prices in annual benchmark pricing negotiations, but are facing resistance from mining groups.
Vale, Rio Tinto and BHP Billiton, which account for more than 70 per cent of the world’s seaborne-traded ore, privately acknowledge that annual contract prices are likely to drop for the first time in seven years. But they are delaying negotiations because they believe ore demand will improve in the next few months.
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One of the great problems with monopoly or near monopoly markets is that they are able to avoid the normal market pressures of supply and demand. Despite recent mergers the steel industry is still fragmented (on a global basis), and steel manufacturers have to compete for business. The iron ore market is dominated by two large players which gives then great power to resist price pressure.
I have mixed feelings regarding the steelmakers, who I believe were quick to profit from rising demand in early 2008, and at times treated customers rather badly. However many of them (like most of manufacturing), are now in a very precarious position, and it will not benefit steel users long term to see any substantial contraction in the steel supply side. The ore producers must take a longer and more pragmatic view on pricing.