¡¡¡¡2008 has already seen iron ore negotiation prices rise by 65%; in 2007, it was only 9.5%. Such a high jump, demonstrating a strong market demand, has far exceeded the expectations of China¡¯s iron and steel enterprises.

¡¡¡¡On Feb. 22nd, Baoshan Iron and Steel Group and CVRD of Brazil reached an agreement to lift iron ore benchmark prices by 65%, meaning Baosteel Group followed prices initiated by Nippon Steel Corporation of Japan. Just three days ago, on Feb. 19th, Nippon Steel Corporation and POSCO of South Korea firstly announced the agreement with CVRD concerning iron ore price rises.

¡¡¡¡Unbalanced supply and demand trigger agreement price rises

¡¡¡¡As to the spot market for iron ore, Hu Kai, analyst believes it is the imbalance between supply and demand that has driven up long-term agreement prices swiftly to approach the spot market index, resulting in such major increases.
¡¡¡¡During the negotiation process of the 2008 iron ore price, great changes have already taken place between the supply and demand in the spot iron ore market when compared with 2007. During the 2007 negotiations, there was a relatively adequate supply of spot iron ore, which restrained the price from increasing. The environment of supply and demand was not to push iron ore long-term agreement prices to soar. At this moment, impacted by factors including large-scale floods in Australia, demurrage, ore suppliers¡¯ indicated intention to reduce supply, the spot market demand now exceeds supply and prices are also rising rapidly, up by 150% over the same period last year. Consequently, both dry bulk cargo transport demand and the sea freight volume have shrunk sharply for the time being.
¡¡¡¡Chinese steel enterprises managed to be the first to set prices in the 2007 annual iron ore negotiations, but this year it¡¯s the Japanese that are a step ahead. This is basically because Japanese iron and steel enterprises do not want to get challenged in a long-term iron ore trade agreement. At present, imported iron ore is equal between long-term agreements and direct importation for China, while 100% of Japan¡¯s iron ore imports are by long-term agreement. Unfortunately the tendency seems to have gone against what Japan has hoped for. Rio Tinto has announced it will provide 15 million tons of spot ore in 2008; Baosteel Group and BHP Billiton recently renewed a 10-year iron ore contract, part of which will be conducted in a flexible pricing mechanism, believed to be a disguised form of spot supply.

¡¡¡¡Sea Freight Remains Uncertain

¡¡¡¡Will increases in the iron ore prices directly stimulate freight rises? Zhang Jian, dry bulk analyst from COFCO, sees it as a somewhat neutral piece of news to the shipping market.
¡¡¡¡As for the recent dry bulk market, rises in iron ore prices will be beneficial, making it a clear short-term supply and demand balance, adding to the public confidence and lifting the shrinking freight a bit higher. On Feb. 25th, BDI index rebounded to 7,296 points, while iron ore sea freight from Brazil to Beilun Port once reached US$ 69.022/ton.
¡¡¡¡However, Zhang Jian also pointed out despite the fact that the new price of iron ore will be implemented from April 1st, it will still be difficult to urge traders to make spontaneous purchases before the deadline as the spot price and long-term contract price are rather close to each other. Furthermore, large steel mills have signed long-term fixed-order agreements each year, so there is no need to hurry for purchase. The whole industry generally expects, as usual, iron ore shipment will enlarge during the second quarter and sea freight will further be picked up.
¡¡¡¡In the long run, whether or not BDI will increase is determined by the contest between input onto the capacity as well as growth in volume. At present, China still depends highly on imported iron ore, which accounts for 55% of the total consumed. It is then reasonable to assume there will be adequate volume supporting 2008¡¯s China iron ore shipping market. What also matters will be the limited number of new ships delivered in 2008, at about 30 million dwt, a minor rise compared to 24 million dwt in 2007. At the same time, the price of iron ore will likely show its growingly apparent leverage: surges in iron ore prices will definitely suppress demand, indirectly impacting the dry bulk shipping market. Zhang Jian comments: ¡°This is too high a price and will lead to global inflation, influencing right down the line from production through to consumption. It will take half a year for such an impact to move finally through to the actual shipping market. Expectably, the long-term shipping market will experience fluctuations with an overall downward trend.¡±
¡¡¡¡Regardless, concerns have also been put forward by professionals in the shipping industry. Although the trend from 2006 to 2007 has depicted drastic jumps in dry bulk ocean freight rates and the shipping industry has experienced an unprecedented bull market, the US$ 100 billion shared by Chinese shipping enterprises is still a relatively limited income for we lack Chinese-owned large bulk carriers. Consequently, international ship owners have seized a large amount of the profits. By 2010, while China will import more than 500 million tons of iron ore, the nation will still own less than 40 Capesize bulk carriers. Such an evident gap between supply and demand reflects the fact that Chinese shipping enterprises are weak in forecasting market tendencies.

¡¡¡¡Shipping Enterprises to Welcome Good Performance

¡¡¡¡As the most essential category among dry bulk shipping, iron ore has fuelled the 2007 BDI-index through to the 10,000 mark by its strong demand for shipping availability, offering shipping companies the most profits. However after release of the 2008 iron ore negotiation prices, as uncertainties in the market disappear, more demand for shipping has clearly emerged. It indicates a continuous good prospect for the 2008 dry bulk shipping market, which will also promote shipping companies to accelerate their cooperation with steel mills. On Feb. 21st, China Shipping (Group) Corporation and Baoshan Iron and Steel Group Co., Ltd. signed an agreement to set up a joint venture, to provide Baosteel with two 300,000-ton and four 230,000-ton large-scale ore boats, specially reserved for iron ore imports. This is believed to make full use of China Shipping¡¯s fleet, then to expand its share in the dry bulk shipping market.
¡¡¡¡To forecast various shipping enterprises¡¯ performance in the 2008 dry bulk market, Lu Congzhen, analyst from Oriental Securities, said that shipping companies should base their value of the investment on the general market trend in 2008 and 2009. As the unique cyclical characteristics in this industry play out, performance outcomes will be reflected over one year ahead of schedule. COSCO has its volume in 2008 set already, maritime shipping orders are to its highest availability, and there have been long-term contracts of carriage signed with Baoshan Iron and Steel Company as well as Wuhan Iron and Steel Company. A brilliant performance is thus almost guaranteed for COSCO. Price negotiations, to the long-term orders, will not impact as much. It should be noted now, though, that the current adjustment in iron ore spot price will later change shipping volume, certainly influencing dry bulk transport.