Did you know that on April 1, 2010, global steel prices jumped by a third overnight? No! Don think of it as a lame backdated April fool joke, as following the collapse of the forty year old annual contract pricing system of iron ore, steel prices have really started boiling.
Iron ore is the basic ingredient in steelmaking, which had been priced on annual benchmark contracts up until now, when the realization set in among the ore miners.
The worlds top mining firms have finalized a deal with major Chinese and Japanese steel mills agreeing on quarterly contracts based on the iron ore spot market. Steel accounts for 95 percent of the metal consumption in the world, which makes this move very significant in the commodity market.
But there should be no out of proportion surprises; being priced on spot market basis the commodity has followed a similar transformation pattern as was observed in oil, aluminium and coal many years ago.
That said, China, of all the countries, has made it an easier decision for the miners as the Asian giant alone accounts for nearly 70 percent of the global iron ore demand.
Chinas strong demand can be gauged from the fact that back in 2000, China accounted for only 16 percent of the global ore market; global demand has doubled since then, whereas Chinas share has gone up nine folds.
Steelmakers have already raised their product prices globally but the worse is yet to come for the end consumers. Summers are fast approaching, and summer contracts price iron ore as high as $153 per ton. Steelmakers have expressed their intentions of passing on the entire impact of increased prices to the end consumers.
The miners deal with Asian countries has not been welcomed by the EU, but reportedly it is least likely that there will be a reversal in the miners historic decision.
In any case, the move has sent panic vibes to the auto industry round the world; and whoever plans to buy a vehicle in 12-18 months time form now, should book one today.
It will not be an easy task for Pakistani car makers to pass on the entire cost increase caused by steel prices, as automobile prices have already been increased many a times in the recent past. The scenario poses a tough challenge for the local auto industry to survive and sustain in such distressful times.
Next in line will be massive increases in construction cost, which could also affect all the allied industries such as cement and paint. Real estate prices may also surge drastically, which is good news for those who own properties, but not so good who are seeking to purchase it.
Price volatility in steel is now rest assured with this new pricing mechanism. The fate of steel prices now rests with the growth of China and only a slowdown in Chinese demand can bring steel prices down. But then, not many in the world see that happening over the next 18-24 months.