Brazilian Miner CVRD (RIO) Negotiates a Monster Increase in Iron Ore Prices
In the ongoing debate over the extent of coupling or de-coupling between the U.S. economy and the emerging markets, a compelling argument for de-coupling emerged this morning from the sun-drenched ‘Paraiso Brasileiro’. The result may just have investors in iron ore producer CVRD (NYSE: RIO) dancing samba in the streets.
Brazil’s Compania Vale do Rio Doce (CVRD), the world’s largest supplier of iron ore, today announced a 65% increase in the rates it will charge to two major steel producers: Japan’s Nippon Steel Corp and South Korea’s POSCO (NYSE: PKX). As the first major price announcement for the industry this year, these results will shape all remaining negotiations considerably, not only for CVRD, but also for competitors like BHP Billiton (NYSE: BHP) and Rio Tinto (NYSE: RTP). They suggest, further, that demand for iron ore, and therefore steel, are anticipated to remain robust throughout 2008.
Even industry analysts were surprised by the scale of the price increase. After all, iron ore prices had already quadrupled since 2003, including a 71% hike back in 2005. In the context of a continued slowdown in the U.S. markets, and amid speculation of a resulting reduction in global demand for steel, today’s news strikes a decisive blow to those pundits who claim that economies across the globe will decline in lock-step with the U.S. If more signs of de-coupling continue to emerge, we may see a resurgence of investor interest in those emerging market equities and ETFs that have plunged so dramatically in recent weeks.
Shares of CVRD declined more than 30% from their November 2007 high above $38 to a recent low above $26, on fears that a U.S. recession would have a deflationary impact upon commodity prices. At Friday’s close of $32, it appears some of those fears were diminishing already, and today’s news seems likely to support this recovery further. Investors would do well to watch the performance of steel producers going forward, though, to track whether steel manufacturers succeed in passing these price increases on to consumers while sustaining demand for their products.