27 April 2010 | Nick Martindale
Steel buyers will need to develop new strategies in response to a deal between mining companies and mills that could see prices increase by as much as 80 per cent, to about $110-$120 (£71-£78) a tonne.
Following the agreement, the market has moved from the system of fixed-price annual contracts – that had been in place for the past 40 years – to quarterly contracts linked to the iron ore spot market.
Companies in the automotive and construction sector are likely to be hardest hit by the change.
Atul Malhotra, head of purchasing at motor component and chassis manufacturer GF Automotive, said: “This will increase the volatility of raw material prices, which in turn leads to more unstable product cost calculations. We would not be able to adjust our market prices so quickly and the risk of adverse impact on the bottom line will be much greater.
“I see this as a new challenge and an opportunity for the procurement teams to prove their worth”.
A spokesperson for the UK-based Society of Motor Manufacturers and Traders expressed concern over “the sudden and dramatic increase in the price of iron ore”.
Meanwhile Nigel McKay, head of procurement and quality management at construction firm Bovis Lend Lease UK, said procurement managers required a number of methods to tackle the new pricing system. “No one strategy will be a success now. It makes it very important to have the right market intelligence.”
Buyers should accept the increase but link it to an index so they can minimise the risk of overpaying when prices fall, said Emilio Reina, principal at procurement consultancy Efficio.
Colin Hamilton, commodities analyst at Macquarie Securities, said the move towards a spot market was the first step towards steel being traded on an exchange, which would allow buyers to hedge.
According to McKay this is one option his company was considering, along with committing to tonnages now to lock in production.
“We can’t even fix our spot price at three months at the moment. We have to go for a financial close on our PFI projects a year ahead of construction so getting our inflation models correct with our client is very important,” he added.
GF Automotive’s Malhotra also said hedging was an option, as well as attempting to persuade other suppliers not to sign up to similar deals.