China iron & steel weekly: Stairway to Heaven

Okay, this missive is ostensibly about iron ore (and steel), but when considering things dug from the ground, how can I ignore the new record price of gold? And, indeed, after a bumper week, it passed another milestone today as the price for immediate delivery hit $1,600.10. “There's a lady who’s sure all that glitters is gold. And she’s buying the stairway to heaven” (J. Page & R. Plant).

Back in the more prosaic ferrous world, MF Global is in a bright mood with its view that the price of iron ore is likely to remain at “elevated levels” near $160 to 170 per ton for three to five years; and the latest benchmark price I have for China is $174.10 spot (+0.6% in the week).

The World’s number two iron ore producer, Rio Tinto, was also in ‘ebulliont’ mood at its Q2 announcement saying that the market was “characterised by continued strong prices”. Similarly, iron ore volumes rose 12%, year on year, to 48.9 million metric tons; albeit assisted by no repeat of the Australian floods. Rio also plans to expand its Australian iron ore operations 50% by 2015 at a cost of some $14.8 billion. This prompted a (lyrical) Liberum Capital to say that “iron ore production will continue to surge ahead for the next four years as Rio continues to execute flawless delivery in its ramp up to 333 million tons a year by the first half of 2015”. This is up from a forecast 240 million tons this year.

Polish was also added by the World Steel Association which is forecasting steel demand to grow 6% next year as requirements from China and India increase.

Also, in China June’s daily crude steel output shone with a new record of 1.998 million tonnes in June. This is up 2.8% from May which also took the month’s tally to 59.93 million tonnes. And, in terms of all steel products, China produced 78.73 million tonnes in June, up 14.8% from a year earlier. Custeel said “the construction of social housing units has accelerated in June, fuelling strong production of long steel products”. And, in July, it is forecasting volume gains for a number of products including wire rod output to rise almost 9%.

Apparently, too, China is producing 7% or so more steel than it lets on, according to consultant Meps. This amounts to some 40 million metric tons per annum – which Meps says is roughly the amount made by Germany. Principally, this is driven by the fact that a number of plants which should have been shut down (uneconomic and dirty) have kept producing to meet local demand; but no one owns up, officially. Meps goes on to say, too, this 'extra' steel production has created higher demand for iron ore, which is one of the factors keeping its price so high; which has also damaged steelmaker profitability and profit per se. For example, since January 2009, iron ore prices have more than doubled, in contrast to a 50% rise in benchmark steel prices. In turn, analysts expect Chinese steelmaker earnings to have fallen 36% in Q2.

Not helping this is Baosteel and Wuhan’s decisions to keep their main product prices mostly unchanged in August i.e. hot-rolled coil prices flat with some grades of cold-rolled up by Yuan 30 to 50 ($6.4 to 7.7) per tonne. This follows cuts by Baosteel in its main product prices by Yuan 100 to 200 in July. Interesting, too, is the decision by Taiwan’s top steel producer, China Steel, to reduce domestic steel product prices for September by an average of 1.69% from July/August; this is said to be due to slowing global economic growth and soft demand.

Elsewhere, Sichuan Hanlong Group has offered 50 cents per share or A$1.2 billion ($1.3 billion), in cash, for the 81.4% of Australia’s Sundance Resources that it does not own – with the aim of controlling the latter’s incipient iron ore project in West Africa. The offer is 25% higher than Sundance’s share price at the close of business on Friday 15 July; although the target has asked its shareholders to sit on their hands. According to Bloomberg, however, the offer is actually 47% more than Sundance’s weighted average share price over the past 20 trading days. What's more, this compares with the average premium of 26% for takeovers of iron ore companies worth more than $1 billion during the past five years. There has also been $6.9 billion worth of iron ore producer bids this year (excluding Sundance), which is the most since a golden 2008 when deals worth $8.4 billion were announced.

Also in Australia, Fortescue, Australia’s third largest iron ore miner saw June quarter volumes rise 6%. It is also looking to buy new delivery vessels for around $500 million and says that it is undertaking some business transactions in Yuan.

And, finally, in Brazil, MMX has agreed a 10 year iron ore supply deal for five million tonnes (per annum) from 2013 at $64 per ton. Brilliant. Plus, in Canada, Advanced Explorations says that initial drill results confirm iron ore mineralisation at its Tuktu project on the Melville Peninsula in Nunavut.

“When we have gold we are in fear, when we have none we are in danger” - English proverb


HEADLINES

• Iron ore prices to remain at “elevated levels” near $160 to 170 for three to five years, says MF Global
• Global steel demand to rise 6% next year, says WSA
• Rio Tinto’s iron ore production recovers with Q2 gain of 12%
• June’s steel production in China rises 14.8% to a new record level
• Consultant says China is under-reporting its steel output by some 7% per annum
• Chinese steelmakers see Q2 earnings down 36%
• Baosteel and Wuhan to keep August hot rolled coil prices unchanged
• Taiwan’s China Steel cuts prices by an average 1.7% for September
• Rio Tinto’s iron ore production recovers with Q2 gain of 12%
• Sichuan China bids for balance (81.4%) of Sundance Resources which it does not already own; prime attraction is the target’s African iron ore project
• Fortescue Metals Group: (i) business transactions in Yuan; (ii) June quarter iron ore shipments rise 6% with new facility; and (ii) discussing $480 million ship order
• MMX shares rises on Brazilian iron ore deal.
• Advanced Explorations receives good news on its Tuktu project on the Melville Peninsula in Nunavut, Canada