Steelmakers Won't Get Squeezed

Is it just me, or was some of this week's media coverage of annual iron ore price negotiations really off base?

For some really quick background, iron ore prices are decided in heated private discussions between the big global miners and leading steel firms like POSCO (NYSE: PKX  ) and Nippon Steel. Huge demand from shipyards, carmakers like Toyota Motor (NYSE: TM  ) , and other Asian industrial concerns has led not only to much higher iron ore prices, but the flying freight rates propelling the likes of DryShips (Nasdaq: DRYS  ) .

Some hasty reports about the initial price settlements directly asserted or merely hinted at the ominous oligopoly power of Vale (NYSE: RIO  ) , BHP Billiton (NYSE: BHP  ) , and Rio Tinto (NYSE: RTP  ) , while casting steelmakers and their customers as the losers of a zero-sum game.

The idea of a steelmaker squeeze really doesn't fly when you look at the situation from the perspective of POSCO. On its recent investor call, the company noted that its budget factored in about a 30% rise in overall raw materials costs. The budget was crafted in December, at which time price negotiations were in full swing.

Now POSCO has agreed to pay Vale 65% more for Brazilian iron ore, which I assume gets the steelmaker pretty close to its anticipated cost rise. But even if this price hike, which is reported to fall short of the rumored rise, takes costs above budget, POSCO recently noted that it has "ample room" to raise prices. Judging by commentary from leading steel analysts, the Korean firm isn't alone in this regard.

So forget the monopoly talk. There's room for more winners in this game.


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