One of Asia’s top steelmakers warned that it will seek to pass the surging cost of iron ore, which reached a five-year high last month, on to customers to protect its margins.
“There’s no immediate risk of an inability to secure iron ore supplies or make steel due to supply bottlenecks,” JFE Holdings Inc. Chief Financial Officer Masashi Terahata said in an interview. “The problem is the price,” he said. The company will need to pass iron ore costs, as well as other expenses, on to product prices for the financial year through next March.
Iron ore climbed to the highest since 2014 in May after a fatal dam disaster at a Vale SA site triggered a series of closures that’s curbed global supply. While benchmark prices have since eased, they’re still near $100 a ton as the tightness is exacerbated by record steel production in China and a slump in stockpiles at ports in the Asian nation. JFE is already paying higher costs on auxiliary materials and distribution, Terahata said.
Japan’s second-biggest steelmaker purchased some iron ore on spot contracts during China’s Lunar New Year holidays in February to increase stockpiles, he said. While Vale has committed to shipping the volumes it had agreed to, JFE is considering sourcing supplies from Australia if the Brazilian company were to cut shipments, according to Terahata. Supplies from Brazil make up 25% of JFE’s iron ore needs, while Australia accounts for 55%.
JFE is worried about the possibility of China shipping cheaper steel to Asian countries if its domestic economy slows, even though the company itself has yet to feel any serious damage from the China-U.S. trade war, according to Terahata. Chinese steel demand remains strong, supported by public spending on infrastructure, he said.
Steelmakers in Japan, the world’s third-biggest producer, face intensifying competition from China, where the government is pushing ahead with consolidating its industry. That includes this month’s announcement that China Baowu Steel Group, the nation’s top mill, will take control of Magang Group Holdings Co.
“China intends to create and consolidate into large mills located in coastal areas, like the ones in Japan, while shutting small and aging mills,” Terahata said. ‘If Chinese mills become in such shape, they will be a threat to us.”