The iron ore story is of course tied into the steel story, and they're joined at the hip. The move by Vale (NYSE:VALE), BHP Billiton (NYSE:BHP) to Rio Tinto (NYSE:RTP) change the way they price iron ore as far as on a quarterly basis versus the old way of annual pricing, has shook up the industry, and China along with it, as iron ore prices skyrocketed as a result.
Frustrated over lack of desired results of negotiating prices, China has taken several steps to lower their dependence on iron ore from these three major providers.
The two major steps are to import iron ore from other countries like Iran, and to increase domestic iron ore production. In April alone, domestic iron ore production increased 50 88 million tons, a 45 percent increase over April of 2009, and a 10.5 percent increase over March.
Add to that the probable and expected decrease in raw materials in China as a consequence of rising inflation, and you have a different iron ore demand picture than was recently portrayed.
China consumes the most iron ore, accounting for 54 percent of all world consumption, and also supplies 40 percent of all iron ore in the world, leading both categories.
Even so, at this time the three major iron ore suppliers, BHP Billiton, Vale and Rio Tinto have no intention of cutting back on expansion plans or capacity, meaning they believe the demand will exceed China's ability to meet it, and they'll have to pay top dollar to attain enough iron ore to meet their needs.
Yet there is also the European sovereign debt crisis hanging over the global economy, which could significantly cut back on iron ore and steel demand as austerity measures are implemented in the region.
The conclusion is the iron ore picture isn't near as clear as it was just recently, as China is the major part of the story, and how China goes, so will go the iron ore narrative.
For the reasons stated above, iron ore prices have already dropped 20 percent since the introduction of the quarterly pricing model, and it remains to be seen how much further they drop before they find a bottom.
For the steel industry in general, they've rebounded nicely today as far as stock prices go, as the drop in iron ore prices will expand the margins, and allow them to possibly drop prices to generate more revenue and earnings.
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