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Material costs haunt steel firms
May. 5th, 2010
By Joe Napsha, PITTSBURGH TRIBUNE-REVIEW
Wednesday, May 5, 2010
As the steel industry moves through early stages of recovery, raw material costs will be an important factor in its return to profitability, U.S. Steel Corp. CEO John P. Surma said Tuesday.
Seventy percent of the cost of production is tied up in raw materials and energy costs, and suppliers of iron ore have enjoyed "significant pricing power" for years, and their power is increasing, Surma told 1,250 attendees at the Association for Iron & Steel Technology's annual conference at the David L. Lawrence Convention Center, Downtown.
Surma, yesterday's keynote speaker, said the three largest iron ore mining companies control about 70 percent of the international market. Iron ore, along with coking coal, is necessary for producing steel in blast furnaces used by steelmakers such as U.S. Steel.
Brazil-based Vale, Rio Tinto plc of Great Britain and BHP Billiton of Australia are the world's largest iron ore producers. The three recently negotiated a pricing system with some global steel producers, primarily in Asia. They will set prices quarterly instead of annually, which will give them more flexibility in determining future prices.
Iron ore prices have fluctuated, with some prices more than doubling in recent months. Spot prices for iron ore sold in China reached $190 per ton recently, and analysts predicted it could reach $210 a ton in the next three months. Prices in Europe have remained around $101 per ton for the past 15 months.
U.S. Steel, for its part, is taking steps to expand its capabilities by looking at potential acquisitions and joint ventures, Surma said.
Surma said he would not rule out looking at iron ore mines or coal mines as acquisitions. But he noted that prices are high, and now might not be the most advantageous time to buy. Whatever U.S. Steel has looked at as a target, it is certain that the Chinese have looked at the same property, he said.
China's huge appetitive for iron ore -- 628 million tons last year and 59 million tons in March alone -- is creating a huge demand for the mineral, Surma said.
U.S. Steel meets almost all of its iron ore needs in North America from its mines in Minnesota, Surma said. The Pittsburgh-based steelmaker is about 80 percent self-sufficient for its coking coal needs.
Companies without their own raw materials are exposed to spot market prices, he said. "The mills with exposure to the open market are playing catch-up," Surma said.
In 2003, U.S. Steel had considered selling its Minntac iron ore operations in Minnesota to Apollo Management, a private equity firm from New York, but backed off that deal.
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