Iron & steel special (July No. 2): “we aren’t feeling any contraction in demand”

Imports of iron ore to China remain robust, with an 8% gain in H1. Note, too, that domestic Chinese production of iron ore hit a new record in May (102.5 million tons). Prices also remain firm despite having drifted 11% from February’s record to an 8 July spot price of $171.20 (and still more than a fifth ahead on a year ago). Similarly, steel company inventories of iron ore remain low, albeit they are at near record levels on the quay side (93.17 million tonnes).

Life has not been easy for the steel producers in terms of profits and margins as they have been unable to pass on the full and mammoth increased cost of raw materials. And this was underlined today by Angang Steel which said net income for the six months ended 30 June may have fallen by some 92% from a year earlier. Nonetheless, its share price rose 1.1% in morning trade to HK$8.85.

Perhaps most significant in the last seven days, however, were the bullish comments on China from Vale’s CFO Guilherme Cavalcanti. He said that the World’s largest iron ore producer sees no slowdown in demand from China as the Country seeks to build 36 million low income houses in the next five years. “We aren’t feeling any contraction in demand for iron ore mainly because infrastructure building is still going on in there and also social housing. The urbanisation process in China is far from over, so we think that these will keep leading the demand for iron ore”.

Elsewhere, Kumba is enjoying its days in the sun with a new record share price clear of Rand 500. This came after the Group said net profit for the six months to 30 June would be as much as 42% higher than the previous year - due to higher export iron ore prices. Kumba, 63.5% owned by Anglo American, is Africa’s largest exporter of iron ore and number four Worldwide.

In other news, Australia’s most unpopular Prime Minister since 1998, Julia Gillard, has announced her Country’s first tax on greenhouse gas emissions from July 2012. She is asking polluters to pay an initial charge of A$23 ($24.74) per ton of carbon dioxide (thereafter rising by the CPI plus 2.5% per annum). This compares with allowances of an average Euro 15.42 (A$20.45) per ton over the past year in Europe. Australia is the largest per-capita polluter in the developed World.

Australia is also the World’s biggest island and in its Western state, the A$5.43 billion Oakajee port and rail project looks like it may founder on lack of funding, albeit Murchison Metals (and its 50% partner and Mitsubishi) are putting a brave face on it. The port and associated infrastructure have been designed to export new sources of iron ore, as and when they have been developed.

And, finally the global ‘iron rush’ has reached the Democratic Republic of Congo where South Korea’s POSCO, the World’s third largest steelmaker, has signed a resources deal. At this time, however, the Congo’s iron ore industry is embryonic.

HEADLINES

• Iron ore imports in first six months rise 8.1%
• 62% spot prices at $171.2 as at 8 July; 11% off February’s record
• Dock side inventories (93.17 million tonnes) remain very close to their all-time peak
• Domestic iron ore production hits new record in May of 102.5 million tons
• Steel exports fell 10% in June versus May; but are ahead 3% in first six months
• Iron ore imports from India to China decline in June as monsoon slow shipments; although they are still ahead 8% year on year
• Vale see no slowdown in China’s demand for iron ore, says CFO
• Angang Steel says that net income in H1 is down by some 92% due to raw materials costs
• Kumba share price sets new record on iron ore pricing
• Australia’s Oakajee port and rail iron ore project may collapse due to lack of funding
• Gillard announces Australia's maiden carbon tax
• POSCO signs resources deal in Congo
• China’s restrictions on exports of nine raw materials break the rules, says WTO