The iron ore prices are very likely to double this year with the new Quarterly Pricing System, which will provide more price volatility due to the spot price market. Very interesting update from March 30th is that there is now an agreement between the top iron ore miners like Vale of Brazil and BHP Billiton of Australia and Japanese and Chinese steel companies that the 40-year old iron ore benchmark system which meant that prices will be done once a year has now been done away with and from now onwards iron ore prices will be decided on a quarterly basis, and that’ the starting of iron ore spot price market.
For those who are not aware, iron ore is the second largest traded commodity in volume terms after oil.So it’s a very large market but without its own index as of now and we believe that this decision is a very major step for a very strong rise in the iron ore prices in the coming quarters and also coming years because a spot price means that the market is going to mature and that the iron ore miners will have much better negotiation power ongoing from now onwards.
What it also means is that along with increasing iron ore prices we will also have increasing steel prices this year because iron ore is the main component for steel manufacturing and just like we are seeing 80 to 100% revision in iron ore prices we could 50 to 60% rise in steel prices in the next year or two. That will have cascading effect in terms of pricing in construction, automobiles and other steel import industries.
So overall the iron ore price increases are going to push up steel price for sure. And this is a major development for manufacturing industry worldwide and we think that their input costs could move up 10-20% depending on how much steel they use. The net beneficiaries of this entire price increase will be the iron ore miners. It is estimated that the just top three miners alone will boost their net profits by about $5 billion this year. So this is a major development in the global steel industry and iron ore miners in different countries are likely to profit as well.