The Iron Ore Market

The iron ore boom continued at full force in 2006 and well into 2007. Price negotiations were concluded unusually early, already in December 2006, and resulted in an increase of 9.5 per cent for iron ore fines and lower increases for pellets. For the first time, a Chinese steel company made the first, benchmark deal, confirming China's overwhelming importance for the iron ore world market. China is now the world's largest steel producer, steel consumer, steel exporter, iron ore importer and the second largest iron ore producer.

World use of finished steel products increased by 8.5 per cent in 2006 to 1,113.2 Mt. All parts of the world experienced strong growth in steel demand, with the increase being particularly large in Europe and the NAFTA area, following decreases partly due to inventory reductions in 2005. Chinese demand increased by 9 per cent to 356 Mt. World crude steel production increased from 1,139.6 Mt in 2005 to 1,239.5 Mt in 2006, an increase of 8.8 per cent. Production in China increased by 18.5 per cent and China now accounts for a third of world production.

World production of iron ore grew by 12 per cent in 2006 to reach 1.5 billion ton. This was a fifth consecutive all time high. Output increased mainly in the four major producing countries Brazil, China, Australia and India. China produced 276.4 Mt (on a comparable grade basis) or 19 per cent of the total world production in 2006. China is now the world's second largest producer, behind Brazil but just ahead of Australia.

International iron ore trade also reached a new record level in 2006 as exports increased for the fifth year in a row and reached 759.1 Mt, up 6.1 per cent. These figures include all export trade including intra-CIS trade. Brazil managed a strong growth to 246.6 Mt but Australia is still the leading exporter at 248.4 Mt. China was of course the most important importing country, accounting for 43 per cent of world iron ore imports.

The iron ore industry has been consolidating more or less continuously since the 1970s. The three largest companies, CVRD, Rio Tinto and BHP Billiton, together control 35 per cent of the global market. After a period of limited M&A activity during 2004-2005, the possibility of an extended period of high prices together with both mining and steel companies having coffers fully loaded with cash triggered another M&A wave in 2006 which has continued into 2007.

New iron ore mining capacity taken into operation in 2006 reached almost 70 Mt globally. This is a considerably higher figure than in the preceding year when only 30-40 Mt of new capacity was registered. Iron ore miners continue to upgrade their plans for capacity expansions. The total project pipeline contains 375 Mt of new production capacity to come on stream between 2007 and 2009.