Iron & Steel Special: “Wake up and…”

T.S. Eliot said that “the first condition of understanding a foreign country is to smell it”. I agree. But, for me, last week in Barcelona it certainly didn’t smell like Spain was in recession. It is, of course, with unemployment in excess of 20% (and more than double that for youths). Nonetheless, vibrancy and optimism (especially about tourism) remain. Greece it is not.

Being away, though, meant digesting a week’s cooking of iron and steel news on my return. Here the aroma was mostly pleasant, albeit there was also the odd, less pleasant waft knocking about. For example, China’s average daily output of steel remained comfortably above 1.9 million tonnes per day for the middle 10 days or so of June. However Custeel.com also pointed out in the period 11 through 20 June, it fell 0.67% (to 1.955 million tonnes) from the previous 10 days. Power rationing and slower summer demand prompted some factories to cut output. The China Iron & Steel Industry Association has also sounded a cautious short-term note driven by rising energy prices and tighter monetary policies. Nonetheless, its forecast that steel demand in China may rise by as much as a quarter between 2010 and 2015 remains intact.

Elsewhere, global iron ore’s number two chef, Rio Tinto, said there is no sign of demand for iron ore slipping and it is serving up as much as possible, with demand strong in China as well as Japan, Korea and Taiwan. “We are producing flat out” said Rio’s Iron Ore CEO Sam Walsh, adding that there are healthy queues at its Western Australia iron ore ports.

Number one chef, Vale, is, however, reported to be less bullish about the prospects for iron ore; albeit this needs to be kept in context. Sure, its new CEO has reduced the Company’s 2015 iron ore eating target by 10% to 469 million metric tons, as demand in China is expected to slow. But this compares with expected output this year of 301 million (up 1% year on year). Vale has also announced that it will buy back as much as $3 billion of its shares over the next half year; with iron ore prices where they are, it can afford to do so.

Not to be out done, number three in the kitchen (but number one overall), BHP Billiton, may add to the almost $23 billion it has spent since 2004 buying back stock. The Company reported on Thursday that it had completed a $10 billion share buyback, six months ahead of schedule. Spending that amount again would still leave scope for a $65 billion acquisition in the second half without “excessive” stress according to Liberum Capital.

Also hot is the Reserve Bank of Australia. It’s index of commodity prices rose 1.3% in June to a new all-time high of 149.8, on the back of rising contract prices for iron ore and coal (2008 saw the previous peak at just 119.5). This is a good job, too, for Gindalbie Metals which may need a speedy share issue and additional trade funding for both its new iron ore project at Karara in Western Australia ($2.7 billion) and the associated Oakajee port/rail facility (now put at $5.8 billion). Once more, the Chinese are reported to be at the table (Angang Steel) as is Murchison Metals, whose share price has fallen sharply as a result.

China’s mining companies have also put M&A back on the menu after a short break. This suggests that the Sector still has the appetite and the funds for overseas acquisitions, even as the Government’s tightens. According to Ernst & Young, M&A deals involving Chinese mining companies increased from $2.1 billion at the end of March to $5.3 billion at the end of May. It also expects M&A activity to accelerate further, outpacing 2010 by 15-25%. “In some ways there is still this requirement for resource security whether or not China is going to have a soft landing”. This includes interest in Sundance Resources’ $4.6 billion iron ore appetiser in West Africa (35 million tonnes per annum from 2014) to which new investors are being invited; thereby joining its largest shareholder (with 19%), the privately-owned Sichuan Hanlong Group.

That said China Hanking, an iron ore producer, has postponed a planned IPO of up to $254 million in Hong Kong due to difficult equity market indigestion.

More enthusiastic is Russia’s United Metallurgical Company (aka OMK) which plans to table some $4 billion of project investment. This includes a new dish (at least to me) called “direct- reduced” iron, a refined form of iron ore which can be used to produce steel without adding coking coal.

Finally, we have the mixed feast of shipping rates: those chartering ships for iron ore and coal transport are doing very well indeed, thank you; while the ship owners are starving. For example, capesize charter rates have sunk 50% in a year and even a record level of ship scrapping (48 this year says Clarkson) has failed to revive them because 117 new vessels have been launched this year. “One man’s meat is another man’s poison”, as Lucretius, the ancient Roman cook said.

HEADLINES

• China’s daily output of crude steel shows a dip in mid-June, due to power rationing and slower summer demand; but tonnage remains above 1.9 million
• Rio Tinto says producing iron ore at full tilt
• Vale reduces 2015 iron ore output target 10% to 469 million metric tons, as demand in China is expected to slow; but this compares with expected output in 2011 of 301 million
• Vale’s share price jumps by the most in 10 months on its $3 billion share buy-back plan
• BHP may add to its $23 billion in share buy-backs as profits surge to a new record
• Gindalbie may need to seek a share issue to fund cost over-runs in its Australia iron ore project; it looks like it will also need additional trade investors in its associated port and rail facility at Oakajee
• Australia commodity index reaches new high in June, says RBA
• China mining companies are mixing it up in M&Q
• Sundance draws up short-list of partners for its $4.6 billion iron ore project in West Africa; but Nippon Steel reported as not involved
• Iron ore producer, China Hanking, delays $250 million IPO in Hong Kong due to equity market turbulence
• JFE and Itochu are to increase stakes in Brazil iron ore mine
• Russia’s OMK seeks to invest in US steel mills, iron ore and coal – and “direct reduced” iron (which is iron ore that can be used to produce steel without coking coal)
• Scrapping of ships rises to new record level; but this does little to help shipping rates