Iron & steel weekly: keep your head 2

- China is to launch its very own iron ore index; as prices record a 42.4% rise in H1 for an additional cost of $16 billion
Not before time, the China Iron and Steel Association has said it will begin a trail run of its iron ore index some time in August, according to Zhang Changfu, its Vice Chairman. This will be followed by an official launch in October and the data will be released on a weekly basis. The index will consist of two sub-indices related to domestic iron ore and imports.

Prices of imported iron ore averaged $160.89 per ton in the first half of this year, hitting a record high, and recording an annualised gain of 42.41% according to the Association. In the first six months, China’s steel producers imported 334.25 million tons of iron ore and the price increase added Yuan 104.11 billion ($16.02 billion) to costs.

- H1 steel volumes rise 9.6% in China; and should clear at least 10% for the year
The Chinese steel industry maintained relatively fast growth in H1 with steel output up 9.6% at 350 million tons, according to CISA. And, for the full year, it expects this year’s output to be between 690 million and 700 million tonnes from 627 million tonnes in 2010 (i.e. +10.0 to 11.6%). Note, too, that the price of raw steel in north China rose almost 2% last week to Yuan 4,520 per tonne, it is reported. July was a busy building month in China, especially for social housing projects.

The Ministry of Industry and Information Technology (MIIT) has also talked about steel trading and believes that China is likely to export 45 million tonnes of steel products in 2011, which would be an increase of 5.7% year on year. Going the other way imports are expected to be little changed at 16 million tonnes compared with 16.43 million tonnes in 2010. Steel product imports in the first half fell 4.8% from a year earlier to 8.03 million tonnes, while exports edged up 3.2% to 24.33 million tonnes.

- Steel mill utilisation in China up to 84% but profitability (3.14% in H1) is under pressure and probably unsustainable
Strong demand has raised steel mill capacity utilisation to 84% in H1 - up three percentage points from the end of last year, says CISA. It also says that China’s steel industry has some 800 million tonnes of steel production capacity – which is at least 100 million more than demand in 2011. This, plus the rising price of iron ore has kept the industry under pressure and CISA says that industry’s profitability, as measured by its ‘sales-profit-ratio’, was just 3.14% in the first half. In my view this is unsustainable. Either, prices have to rise and costs fall (possible) or the industry needs to step up its rationalisation (more likely). Looking forward, too, MIIT has warned that steel production may slow in the second half on lower industrial production growth, power outages, the closure of inefficient steelmaking capacity and tighter credit.

- Indian spot prices for iron ore firm up ; and in one reported deal hit $188 delivered in China:
Indian spot iron ore prices also remain firm and reflect both tight supply and expectations that higher Chinese steel prices will support demand. Shipments from the World’s third largest exporter have been disrupted by the monsoon and a slow resumption of exports in the State of Karnataka (where around one quarter of the Country’s iron ore shipments originate). Supplies have also been hit by Government bans on mining/exports.

On Tuesday last week Indian fines with a 63.0 to 63.5% iron content sold to at least one Chinese trader for $188 per tonne, including freight, it is reported. This is roughly $2 more than the week before. That said, the smart money is focused on shipments priced at less than $185. On a modestly positive note for volumes, too, India’s State-run NMDC raised its iron ore output target to more than 30 million tonnes in the year to March 2012, after the Country’s top court allowed it to restart mining in Karnataka (the earlier target was 28-29 million tonnes). That said, even after this news, JSW Steel is still only operating its mills at 80%.

- Rio disappoints in H1 due to currency and labour costs; its iron ore business, however, was robust:
Rio Tinto, the World’s second largest mining company, reported last week its underlying profit in the first half of 2011: up 35 % to $7.8 billion, which missed analysts’ forecasts which were clustered around $8.3 billion (foreign exchange movements alone cost USD 810 million). The Company also expanded its share buyback by $2 billion to $7 billion.

The Company underlined the impact of the rising Australian dollar (the US currency fell 16% against it in H1) and labour costs which are hurting earnings and which will be a challenge in coming years, putting pressure on expansion plans.

In terms of the iron ore market, CEO Tom Albanese said it will remain tight as global suppliers are struggling to meet demand from China. Its economy is estimated to expand by close to 9.5% this year, driving global growth to 3.0 to 3.5% in 2011, he said. “Many producers around the world are struggling, too, with their own supply and their own growth and that’s continuing to keep tight conditions and higher prices for iron ore”.

OTHER NEWS
- Coal & Allied:
Rio will also look at more acquisitions after tidying up it joint holding (with Mitsubishi) in Australia’s Coal & Allied. The two (who will end up with an 80:20 split respectively) have offered to buy the 14% they don’t own for A$1.49 billion ($1.56 billion) or A$122 a share, a 34% premium to the coal miner’s last trade. Perpetual Investments, which owns 6.3%, backed the offer although Coal & Allied said the offer was incomplete and was not capable of being accepted.

- Sesa Goa buys in Liberia:
Also in India, Vedanata-owned Sesa Goa said it has agreed to acquire a 51% stake in Liberia-based Western Cluster Limited for $90 million from US owner Elenilto Minerals & Mining. WCL is the winner of a bid to develop the Western Cluster iron ore deposits floated by the Government of Liberia: with access to over 1 billion tonnes of potential resource.

- Bellzone looks to iron ore from Guinea:
Bellzone Mining will initiate iron ore production in the Guinean town of Forecariah in March 2012, says CEO Nik Zuks.

- Zambia may mine as much as five million tons of iron ore annually:
Zambia will probably “soon” mine as much as five million tons of iron ore a year, according to Radio Phoenix.

- India’s Essar to invest up to $4 billion in Zimbabwe steel plant:
Indian conglomerate Essar plans to spend up to $4 billion building a steel plant which will access iron ore from Zimbabwe’s Mwanesi resource within the next five years, it is reported. This would be the largest single foreign investment in Zimbabwe’s difficult economy and would equal around two thirds of its GDP.

- ArcelorMittal to sell China JV stake to Nippon Steel; but is criticised by CISA about is relationship with Valin:
The World’s largest steelmaker has agreed to sell its 12% stake in an auto sheet joint venture with China’s Baosteel and Japan’s Nippon Steel to the Japanese firm. This will mean that the latter two will own 50% each. AM said the move is aimed at focusing on another automotive JV project with Hunan Valin. However, the China Iron & Steel Association (CISA) has criticised ArcelorMittal for not fulfilling its commitment to support Valin, especially on iron ore supply.

- Taiwan’s China Steel and Sinosteel form an alliance:
Taiwan’s largest steelmaker has signed a strategic alliance agreement with Sinosteel Corporation, which is controlled by the PRC Government. The companies will strengthen cooperation in areas including production, trading, engineering and management. No financial details were provided.

- CSN may buy more shares in Usinas:
Cia. Siderurgica Nacional SA (aka CSN), the Brazilian steelmaker which posted a 30% gain in Q2 net income (to Reais 1.14 billion or $726 million), may buy more shares in domestic rival Usinas Siderurgicas de Minas Gerais SA (USIM5) after building a 10.2% stake. CSN has been buying stock in its bigger competitor since at least January and its Q2 sales gained 12% to Reais 4.32 billion as iron ore increased 8.3% from a year earlier to a record 6.74 million metric tons. The Company also posted a gain of Reais 698 million from selling a stake in Riversdale Mining to Rio Tinto in April. CSN expects “stability” for steel prices in H2 and plans to spend Reais 11 billion over the next five years on mining and port investments.

- Toyota agrees to pay $169 more per ton of sheet steel after discussions with domestic supplier Nippon Steel:
Toyota has agreed to Nippon Steel’s demand for a price rise of Yen 13,000 ($169) per ton of steel sheet for the April-September period, it is reported. The increase is the largest since the first half of fiscal 2010 when prices were jumped by almost Yen 20,000.