Iron & steel weekly: $1,624.07

Chrysopoeia is the transmutation of base metals into gold or silver and is more commonly know as alchemy. Okay, despite four millennia trying, no one has actually been successful; albeit with gold at more than $1,620 per ounce it feels like it.

But it would be errant to ignore base metals (despite them being less glamorous) and, in particular, iron ore which has doubled in price in three years. It is also a less fickle bed fellow and top consultants (and part-time sleep counsellors), MEPS International, agree. For example, they reckon that China’s iron ore demand will rise 8.5% this year (i.e. 2011) to 1.07 billion tons.

In turn, this comes after record global steel production in June: up an annualised 8% to 127.8 million tonnes (China also hit a new high in June). Yes, the rate of growth may ease in Q3, but Ernst & Young is on record as saying that global steel production is set to rise 7% in 2011 on the back of China and India. Taking this a step further, Kumba Iron Ore Limited (see below) says that Chinese steel production will grow by an annualised 8% in H2.

- Kumba
As you can imagine, Kumba, the World’s fourth largest supplier of seaborne iron ore (62.3% owned by a grateful Anglo American), is enjoying its days in the sun. Its H1 net profit rose 40% - mostly on price appreciation - to Rand 9.05 billion ($1.32 billion). Volumes were static at 22 million tons (which is good given the wet weather in South Africa) but, with international customer prices up 56%, H1 sales climbed 35% to Rand 24.1 billion. This also meant that net margins rose from their already astonishing level of 36.4 to 37.6%. The Company was also generous with shareholders, hiking its interim dividend by 61% (to Rand 13.50 per share) with cover edging down from 1.5 to 1.3x.

In addition, Kumba is looking to expand in West Africa with a notional target of 10 to 20 million tons of output by 2020. However, nearer term, the Company expects “modest downward pressure” on iron ore prices in H2, as crude steel production seasonally eases; its full year costs are also predicted to rise 25%.

- the big three + 1 are bulls on China
Nonetheless, Kumba is another one benefiting from demand in China, a view endorsed by number three iron ore supplier BHP Billiton, which has just reported record production for an 11th year, driven by sales to China (in Q4 volumes rose 14% to 35.2 million tonnes). World number one, Vale said the same thing earlier in July i.e. it sees no slowdown from Chinese customers as the Country seeks to build 36 million low income houses over the next five years. And, finally, second in line to the throne, Rio Tinto, reported last week that its iron ore volumes rose 12% in Q2.

- India
Elsewhere, there is ‘trouble at mill’ in India, the World’s third largest national source of iron ore exports. In a Reuters opinion poll, the conclusion is that volumes shipped internationally could fall by a fifth to 71.25 million tonnes in the year to March 2012. This is due principally to a number of export restrictions at a national and local level; tariffs and higher costs are also factors. Furthermore, the Federation of Indian Minerals Industries reckons the tally could go as low as 64 million tonnes.

- Freights costs
On the high seas, perhaps the largest-ever over supply of ships has led freight prices to their lowest level in 10 years – relative to the cost of iron ore. For example, an iron ore voyage from Brazil to China now costs 10% of the value of its cargo – compared with 64% in 2003, according to data from Fernley Consultants. They also say that shipping rates will not rise until at least 2013. For the record, the Baltic Exchange says that capesize charter rates per day are now $11,314 for a one-off trip, compared with $234,000 in June 2008.

- Valemax
Meantime, Vale’s new, huge valemax iron ore carrier has sailed to Italy rather than China. Apparently, this was due to draft restrictions at Dalian not having been sorted out and a request from a European customer who needed raw material. Really? For the record, the ‘Vale Brasil’ is 362 metres long, which is one-and-a-half times the length of London’s Tower Bridge. It is also the first of 19 such behemoths planned at a cost of $2.3 billion; and, it is reported that, Vale will control another 16 under long term contracts. Number two, the China-built and eponymous ‘Vale China’ will start work in a couple of months with the remainder expected by the end of 2013. Vale may also revive plans to build an iron ore distribution centre in China; and this could well be similar to its $1.37 billion maritime terminal nearing completion in Malaysia.

- Posco
There is also expansive news from the World’s third largest steelmaker, Posco, which reported a 23% increase in Q2 net profit to Won 1.37 trillion ($1.3 billion) as a recovery in demand allowed it to increase prices. Sales did even better with a gain of 58% to Won 17.05 trillion; which also means net margins eased from 10.3 to 8.0% (compare these returns with those of Kumba - above - which are around 38%). Posco raised the price of benchmark hot-rolled steel plates by about 18% in April, albeit this compares with the 25% more it paid for iron ore in the June quarter versus March (and some 47% extra for coking coal).

- Goldmans, Citi & ThyssenKrupp
Finally, Goldman Sachs, which began to trade iron ore swaps earlier this year, is now preparing to enter the physical iron ore market, it is reported; and, Citigroup is doing the same. The belief is that it can offer an even better service with a foot in both camps, so to speak. There could well be a better margin in it too, I reckon. In any event both will be pleased with ThyssenKrupp’s view that iron ore prices will fall in 2014 at the earliest. How do they know?

“Nothing gold can stay” - Robert Frost