May 23, 2007 / 3:51 PM / 13 years ago

Freight costs to support steel prices

LONDON (Reuters) - As if booming demand from China and a rapidly consolidating production base were not enough, now the cost of shipping looks set to keep steel prices high.

A labourer works at a steel-making factory in Liaozhong county, northeast China's Liaoning province December 23, 2006. As if booming demand from China and a rapidly consolidating production base were not enough, now the cost of shipping looks set to keep steel prices high, speakers at the Reuters Global Mining and Steel Summit said this week.. REUTERS/Sheng Li (CHINA)

That was the opinion of speakers at the Reuters Global Mining and Steel Summit in London this week, who saw no reason for the cost of getting essential raw materials to steelworks to fall.

To a large extent, the price of steel is dictated by the cost of its basic ingredient, iron ore.

“The iron ore cost isn’t just a function of mining cost, but also of transport cost,” said Jay Hambro, Chief Executive of Aricom TIO.L, which mines iron ore in the east of Russia, close to the Chinese border.

While Chinese steelmakers have to pay around $40 per tonne to have it shipped from major producer Brazil, they could have it railed in from Russia for less than a quarter of that, he said.

“I don’t see freight costs going down,” Hambro said. “It’s freight availability and it’s port availability. Port availability is even more of a problem — if you go to Southern China, you see container ships in a traffic jam.”

Prices of iron ore have rocketed in recent years — a record-breaking 71.5 percent increase in 2005 was followed by rises of around 20 and 10 percent for the next two years — even though the material itself is naturally abundant.

“Constraints on raw materials are more about freight and bottlenecks in sea transportation,” said Ian Christmas, Secretary-General of the International Iron and Steel Institute.

Rates for the cape-size vessels that haul iron ore from Brazil to China are at a historic high of $140,000 per day, making freight almost as expensive as the ore itself, industry officials said this week <ID:nL21615943>.

And while shipbuilders may be working flat out to replenish the fleets — itself a task that requires a lot of steel — ships are little use without a port in which to berth, or a railway line to shift the cargo to the factory gate.

“It’s not actually ships themselves, it’s ports and infrastructure,” Christmas said.

COST DISADVANTAGE

Finnish steelmaker Rautaruukki RTRKS.HE shifted its target markets from Western Europe to closer countries partially as a result of high transport costs.

“There’s a 6 or 7 or 8 percent transport cost disadvantage if you produce in Finland and ship to Western Europe. Freight cost has had quite a big impact,” Chief Executive Sakari Tamminen said.

“The key raw materials for steelmaking are very transport intensive, which has been one of the main factors,” he said.

Placing orders for iron ore from Brazil or Australia, or coal from Australia, the U.S. or Canada means competing with Chinese buyers for ships.

“As long as growth in China continues, that will keep transport costs high,” Tamminen said.

Equally, as long as bottlenecks and under-capacity in the global transport network continue to support raw materials prices, steel prices will stay high, an investment banker in the sector said.

“Why would raw materials prices come down?” asked Laurent Charbonnier, European Head of Steel, Paper and Packaging at UBS.

“It’s one thing to dig a hole in the ground, but you have to put it on a train,” he said.

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