Steel yourself for staggering price increase

 

The price of fridges, cars and new buildings is about to rise dramatically as steel producers pass on increases in the cost of their raw materials. Vale, the Brazilian miner, last week settled on a staggering 65 per cent increase in the price of iron ore, the basic ingredient of steel.


Analysts expect that this will feed through to a 20 per cent increase in the price of steel – and guess who will end up paying for that. The price rises are particularly troubling for Dubai as steel is used to reinforce concrete structures, so expect to pay even more for new apartments or office blocks.

Given the importance of steel to the global economy the pricing mechanism for its key component is peculiar to say the least. Iron ore prices are negotiated annually and the first mining company that settles with a big steel producer sets a benchmark price for everyone else.

So, Vale’s deal with Nippon Steel last week means that a 65 per cent rise will be locked in for everyone (although some miners may be able to negotiate even more). This is an odd way to price one of the world’s most important natural resources.

Unfortunately Vale, Rio Tinto and BHP Billiton control nearly 80 per cent of the global supply of iron ore so they can, therefore, effectively force buyers into accepting annual price settlements in order to guarantee deliveries. This smacks of cartel-like behaviour and that is never good for consumers. (David Robertson is business correspondent for The Times of London)

 

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