KUALA LUMPUR: Malaysian steelmakers, as with their global peers, may see adverse impact such as higher cost of iron ore resulting from the joint venture (JV) announced a week ago between mining giants Rio Tinto and BHP Billiton.
The JV that would combine the iron-ore mining operations of Rio Tinto and BHP in Western Australia is expected to bring more than US$10 billion (RM34 billion) in savings for both firms in terms of production and development synergies.
Rio Tinto and BHP have a combined iron ore production capacity of 350 million tonnes per year.
But despite significant cost savings, there are concerns that the JV would not result in lower prices of iron ore but rather higher cost for steel millers as Rio Tinto and BHP would command even bigger bargaining power to drive up prices.
“By extension — this could have significant impact on the bargaining leverage of steel millers all around the world, including Malaysia,” said AmResearch.
As a matter of fact, the JV could effective turn the global iron ore market, currently dominated by three large players (the largest is Vale SA of Brazil, followed by Rio Tinto and then BHP), into a duopoly.
Already, major iron ore importers such as China and the European Union (EU) have immediately protested against the JV. Malaysian steel millers too could be disadvantaged if the JV brings negative consequences on iron ore pricing.
AmResearch said local steel players that purchased iron ore included Perwaja Holdings Bhd — a unit of KINSTEEL BHD  — and the Lion Group. ANN JOO RESOURCES BHD  will also be stocking up iron ore ahead of the rollout of its new blast furnace plant by July 2010.
Nevertheless, local steel players have downplayed the negative consequences of the Rio Tinto-BHP JV somewhat.
“It will be too early to comment on the possible impact of the JV on the global steel market. However, as a steel miller, we hope that with the JV, any cost efficiency will be passed back to consumers, and resulting in better economies of scale for all parties,” said Perwaja managing director Tan Sri Pheng Yin Huah.
“The iron ore market was already dominated by three major players. If it were to change to a duopoly, it wouldn’t bring much difference in terms of pricing dynamics,” Ann Joo said in an email reply to The Edge Financial Daily.
The company explained that the benchmark pricing negotiation for iron ore has always been between the three miners and the Japanese and Chinese steel millers.
“Iron ore prices very much depend on the steel market outlook or the demand-supply dynamic. Prices will drop if there is no demand from the steel industry,” it said, adding that the Rio Tinto-BHP JV still had some legal and political hurdles to overcome.
Nevertheless, Rio Tinto and BHP in a joint statement have estimated that the JV deal to be completed in the second half of 2010.
OSK Research’s steel analyst Ng Sem Guan said consensus estimates for iron ore price next year pointed to a 20% to 30% rise.
Iron ore prices, which was set on the Japanese calendar for a period of 12 months from April 1 to March 31 each year, rose 9.5% from 2006 to 2007 and by 65% from 2007 to 2008. Nevertheless, it was 33% lower for the April 2009 to March 2010 period.
Ng said China did not conclude its annual iron ore benchmarking talks with suppliers this year and had been buying on the spot market.
Usually, China, being the largest iron ore buyer, sets the global benchmark price in its negotiations with suppliers. For smaller buyers such as the steel and iron millers in Malaysia, they buy part of their requirements at the benchmark price with the remainder at the spot market price.
“With or without the JV in place, the outcome for the 2010 benchmark price setting is still uncertain at this point of time,” said Ann Joo.
Lion Industries Corp Bhd also played down the impact of the JV. “Currently, the three big suppliers already control 75%-80% of the world’s iron ore supply. The JV is not expected to have any major impact on the existing iron ore supply situation,” it added.
Local steelmakers still expect improved profits next year, with more CONSTRUCTION  activities to come on stream in the country. It has been reported that infrastructure projects worth an estimated RM61.7 billion would be rolled out in the next six to 12 months.
“The boost in construction sector will lead to higher demand for steel and other construction-related products, which will have a positive impact on the overall economy as well as the steel sector,” said Perwaja’s Pheng.
Meanwhile, AmResearch maintained its overweight call on the local steel sector as an anchor reflationary theme.
It said unlike cement, prices of steel were at the early stages of a cyclical upswing. Furthermore, earnings of local steel companies should gain traction as domestic steel demand supplant exports moving into 2010.
Written by Financial Daily