Monday, July 05, 2010

Could rising ore prices halt recovery?

Came across this interesting article on the BBC website today

By Tim Bowler
Business reporter, BBC World Service

Are the world's iron ore mining companies putting the world recovery in jeopardy, by forcing up prices?

Iron ore is a key component in the manufacture of steel, and is used in construction and heavy industry everywhere.

It may not have the immediate glamour of a precious metal, like gold, but is nevertheless vital for economic growth.

Steel itself is used in a myriad of everyday products - from household items such as fridges and washing machines, to cars, buses, trains and the steel girders used in most office buildings.

Three big mining companies, Rio Tinto, Vale and BHP Billiton, dominate the global market in iron ore.

According to their customers, the steelmakers, they are putting up the price of iron ore unfairly. It's a charge the mining companies deny.

Pricing switch

In the past, the mining firms used to fix the price of iron ore once a year. But this year they have switched to three month contracts, and iron ore prices have risen steeply.

The steelmakers argue that higher raw material costs could push up costs for manufacturers and consumers, and thus threaten the global recovery.


Read the full article here

Whilst market forces dictate that increasing demand will inevitably lead to increasing prices, competition amongst suppliers helps to negate the most extreme moves. However when there are only three major suppliers in the world they are close to being in a monopoly position and able to exert price increases almost at will.

When it is important to get the global economy moving again the fact that a single sector in an important supply chain can wield such power is a worrying issue.

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