BIG GAINS IN STEEL MARKETS

Due to China's dramatic growth and need for steel to build ships and manufacturing plants, the steel industry had spectacular growth in 2004. But, iron ore producers want their share of the profits, which could cause the cost of steel to skyrocket.

The big three iron ore producers, CVRD, PHP Billiton, and Rio Tinto, have a 70% market share. These producers shocked the steel industry with a 71.5% cost increase in initial negotiations in Japan, which has established a worldwide benchmark in costs.

Iron ore producers claim that companies like Mittal Steel, a London based multinational company, recently announced that its 2004 profit quadrupled to $4.7 billion. Arcelor, a Luxembourg steel producer, agreed to accept a huge increase for iron ore from the world's largest producer Brazilian CVRD. The new deal comes on the heels of a 19% price increase from last year, and steel producers are screaming about arm-twisting tactics.

On top of the price increase for ore, steel producers has also been hit with twice the cost for their coking coal, which fuels the blast furnaces. Car manufacturers, which are the largest consumers of steel, are demanding that steel companies share the cost increases and not try to pass all the cost increases on to customers.

China is the world's largest steel customer, but the Chinese government has tried to cool down the red hot economy by squeezing credit to companies. The steel industry claims that, with China's demand dropping and the cost of steel increasing, that an overcapacity of steel could occur quickly, like the glut of 2002, which drove steel prices to a 20 year low.