The Iron Ore Market

World crude steel production decreased from 1326.6 Mt in 2008 to 1219.0 Mt in 2009, a dramatic fall of -8.1 %. But while most of the world saw falling production, crude steel production in China increased by 13.5 %, compared to the 2.3 % growth the year before. China now accounts for almost half of the world production of crude steel (47 %). In 2010, Chinese steel production drives growth, but there has been some growth in most other large producing countries as well, compared to 2009. If the production rate of the first four months of 2010 continues, the total output of crude steel in 2010 will be somewhere around 1410 Mt (similar to the record year of 2007). The latest World Steel Association’s short term forecast for world steel use anticipates a rise in steel use by 10.7 % in 2010.

World production of iron ore fell by 6.2% in 2009 to 1.6 billion tons. This was the first fall in production after seven years` consecutive growth period. Output decreased in most countries, with a few notable exceptions such as Australia and South Africa but this was not enough to stop the fall. China which used to be the largest producer has now been pushed down (on the converted iron ore content basis) to fourth place at 234 Mt, after Australia at 394 Mt, Brazil at 300 Mt, and India at 257 Mt.

Despite the recession, iron ore trade reached a new record level in 2009 as exports increased for the eighth year in a row and reached 955 Mt, up 7.4 % compared to 2008. The increase was the result of higher demand in China combined with a fall in domestic production.

The annual bench mark negotiation process was finished in early 2010. In spite of vocal opposition mainly from Chinese steel companies, with strong support from Japanese and European steel industry organisations, there was nothing that could make it survive. A quarterly semi-negotiated price is now the norm. The new model has brought uncertainty and reduced the transparency of the iron ore market. Prices are no longer announced like they used to be and the published series of spot prices are still not 100% reliable.

The three largest iron ore companies, Vale, Rio Tinto and BHP Billiton increased their control over global iron ore production to 35.4 % in 2009 (34% in 2008). The "Big Three" control 61% of the world seaborne trade of iron ore. New iron ore mining capacity taken into operation in 2009, reached almost 75 Mt globally.

The world iron ore market will be characterized by tight conditions and the next few years - by a gradual adaptation of supply, by way of addition of new capacity, to a continuously growing demand. Accordingly, we believe that supply will gradually catch up and that prices will decline from the present extreme levels, but will stay at a higher level than in the period before 2008.