Eurofer, which represents European steel mills, has complained to the European commission about the possible price fixing scheme by the three major iron ore producers, namely Vale, Rio Tinto and BHP Billiton. Some went further and accused the three miners of being an oligopoly. The fury was unleashed when the steel mills couldn’t agree on yearly contracts and settled for quarterly pricing updates. Miners were also asking for an almost a 100 percent increase, up from $60/mt to $110-$120/mt. To add insult to injury, two of these big boys, Rio Tinto and BHP Billiton, would like to merge Australian mining operations and further increase their pricing power. This way, they could control production and charge customers whatever they would like, even in this crummy global economy. How else can you make a 100 percent price increase work in this recessionary environment? 

True, these three miners own roughly 80 percent of iron ore production in the world. But it’s also true that this picture hasn’t changed much in the last few years. Regardless, we have seen the iron prices go down, but those down cycles were fairly short-lived. Why is that? Is there a sinister plot going on, or despite the perception of low steel demand around the world, there is even more demand for raw materials?

Let’s look at the other raw material, ferrous scrap, which is totally unrelated to iron ore other than both are used to make steel. Scrap is not mined, it’s collected; and unlike iron ore, there are thousands or perhaps even millions of recyclers and processors around the world. Yet, scrap prices also went up by about 120 percent since this time last year. Is there also an oligopoly here?

And let’s look at steel prices. Take the basic hot rolled coil prices in the US Midwest. Last April, coil prices were just below $18.00 cwt. ($396/mt) and now they are pushing $35.00 cwt. ($771/mt)—nearly a 100 percent increase! Is there also an oligopoly here?

No, the real reason is the ever-increasing appetite for steel making; not from the G7s of this world but from developing nations with big populations like China, India and Brazil. We had a meltdown on Wall Street, but the world didn’t come to an end. All the billions of people in the developing world who have no cars, no fridges or no washing machines have their eyes on our lifestyles and they will eventually buy those items made with steel. This basic fact is not going to change for many decades. And it’s not just for steel; other commodities and energy are also in high demand. That’s why the oil prices too have gained more than 100 percent from their lowest point in 2009.

The year-on-year price increase the steel mills achieved is $375/mt but when it comes to iron ore, the world will come apart if the ore cartel shoves their $60/mt increases down steel mills’ throats.  Some economists even predicted that these increases might threaten the fragile recovery of steel consumption markets: construction, appliances, automotive, you name it. 

I have some news for these economists: steel prices have already increased with the anticipation of the raw materials increases. What’s more, increasing raw material prices are the best thing that could happen to the steel industry. Without a strong rebound of raw materials, steel prices could have no chance to rebound to the current levels. After all, raw material prices are the best excuse steel sales people can give to their customers who complain about grim sales and high steel prices. They always say: “Raw material prices are going up significantly, we have no choice but to raise our prices as well.” So, relax and stop complaining about the high iron ore and scrap prices. Be grateful and thank your friendly raw materials suppliers for raising your prices.