Iron & steel weekly: BHP and other stories

Bestriding the week like the colossus that it is, BHP produced a sparking set of full year figures - with net profit up 86% to almost $23 billion and a margin of 33%. In the supporting cast (of thousands), the Chinese steel industry showed it was no slouch either and daily production rose further (okay by just 0.26%) in the second 10 days of the month (CISA’s choice) just as it did in the first (+0.4%). In fact, in the 23 ‘official’ 10 day trading periods of 2011, daily production has risen on 15 occasions. In the latest period, too, the key driver was the expectation of stronger demand from construction in the autumn.

Elsewhere, iron ore prices continue to ignore the World’s economic travails and, last seen were up a touch at $177.9 delivered in China (on 23 August) said Steel Index. Similarly, BHP noted that the spot price for iron ore is trading at close to $178 per tonne, which is not far off the record $191.90 touched in mid-February; and nearly triple the price in late 2008, thanks to booming Chinese demand. The Group also added that it continues to favour long term iron ore supply contracts in its trading.

But this has not done any favours for the profits of China’s listed steelmakers and when 27 of them released their H1 results on Monday, after the market had closed, their combined net profit showed a slump of 16% year-on-year to Yuan 9.98 billion ($1.56 billion), according to Wind Information. And, 16 of them reported lower profit margins. Similarly, Mysteel said “the steel industry will continue to suffer great pressure during the second half of this year”. Not that this stopped, Baosteel taking 51% of middle-sized steelmaker Shaoguan Steel in Guangdong province as part of the Country’s steel restructuring plan. Okay, it was a free transfer on this occasion.

Elsewhere, Taiwan’s China Steel will raise prices 1% in October/November, while capesize freight rates have risen 26% since 1 July as Japan rebuilds. Meantime, in India, Sesa Goa continues to be restrained by Indian Government iron ore mining restrictions, while in Canada the Quebec Government has announced an $80 billion regional development plan focused on attracting Japanese and Chinese natural resource investors to the region.

Further south, USIM, Brazil’s number two steelmaker is looking to quadruple its iron ore production, and would very much like to win the auction for a new $1 billion port terminal to be built in Rio de Janeiro State. Then, moving east, South Africa’s Assore has doubled its 2011 net profit to $440 million, principally on iron ore.

Down under in Australia, Peabody Energy and ArcelorMittal have increased their joint takeover offer for Macarthur Coal by 3% to A$4.9 billion ($5.2 billion) - and it has been accepted. Macarthur is the World’s largest producer of pulverised coal which is used as a replacement for coke in the production of pig iron. Note, however, that Citic Resources, which owns 24.5 % of Macarthur, has made no comment thus far. However, the offer from P/AM only needs 50.1 % of acceptances.

Finally a lot seems to be happening in Russia where its largest steelmaker, Severstal, has just reported that Q2 net profit had more than tripled from $192 to 602 million; it also enjoyed a 47% EBITDA margin. Steel makers in Russia, the World’s fifth largest producer, are benefiting from being low cost producers, but the vertically integrated companies are showing the greatest year-on-year improvement. For example, MMK, Russia’s third largest producer, saw its Q2 net profit fall from $53 to 13 million.

In addition, IRC, a Hong Kong-listed iron ore company mining in Russia, posted its first ever profit after commencing sales from its Kuranakh mine; prices were also higher. Net income for the six months ended 30 June was $3.6 million, compared with a loss of $51.9 million a year earlier. Revenue, meantime, increased to $60.4 million from $5.2 million a year earlier.

And last but not least, Fleming Family & Partners, a UK private equity firm, may invest $2 billion to develop iron ore deposits in the Chelyabinsk region of Russia.

“The finest steel has to go through the hottest fire”
- John N. Mitchell

DETAIL

- China’s daily steel output increases slightly (+0.26%) in the 10 days ending 20 August, says CISA
China’s daily crude steel output stood at 1.947 million tonnes in the period from 11 to 20 August, which is an increase of 0.26% from the previous 10 days, as plants plan to take advantage of an expected revival in demand in the autumn, says the China Iron and Steel Association. This is also the second consecutive ten day period in which it has done so. And, in the year to date there have been 23 ‘official’ 10 days trading periods and on 15 occasions daily production rose.

"China’s overall investment in construction projects has remained aggressive this year which is the driver behind steel production” said Smart Timing Steel. It is also the case that steel mills benefited from a robust level of construction actvity even during the summer, when it normally slows down i.e. daily steel output has remained close to the record of more than 2 million tonnes set in the last 10 days of June. Similarly, daily steel output has stayed above 1.9 million tonnes since February, up from an average of about 1.7 million tonnes last year. “The next two months are normally the last opportunity for large sales for steel mills as demand traditionally picks up and pushes prices higher” said Anshan Iron & Steel. In addition, China's major steel companies have all raised main product prices for September sales.

- China steelmakers’ profits weaken as iron ore prices rise
China’s steelmakers saw their profits sharply reduced by higher iron ore prices in the first half of 2011. For example, 27 listed Chinese steel producers released their H1 results on Monday, after hours. Their combined net profit slumped 15.7% year-on-year to Yuan 9.98 billion ($1.56 billion), according to Wind Information. And, of the 27 listed steel companies, 16 reported lower margins.

In the first half of 2011, China imported 334 million metric tons of iron ore, 8.1% more than a year ago, says the NBS. And, the average price rose by 42.4% year-on-year to $161 per metric ton.

Meantime, China’s steel output grew by 9.6% year-on-year in H1 to 350 million metric tons, but the industry’s profit margins dropped to 2.42% in the first five months, the lowest in many years, according to the Ministry of Industry and Information Technology (MIIT). It attributed this weaker profitability to rising iron ore prices.

Similarly, Mysteel said “the steel industry will continue to suffer great pressure during the second half of this year”.

This included China’s largest listed steelmaker, Baosteel, which saw net profits fall 37% to Yuan 5.08 billion ($796 million). It was particularly affected by lower demand from the auto industry. Q3 profits are also expected, by the market, to be lower.

- Baosteel acquires 51% of Shaoguan Steel
Baosteel Group will take a 51% stake in a middle-sized steelmaker Shaoguan Steel in Guangdong province as part of the Country’s steel restructuring plan. The free transfer of the stake is still subject to approval from State Assets Regulator.

Baosteel Group, the second largest manufacturer by output, agreed to set up a joint venture named Guangdong Steel Group in mid-2008. It controlled 80% with Guangzhou Steel, while Shaoguan owned 20%. Guangzhou Steel and Shaoguan Steel, both owned by the Guangdong provincial government, will also withdraw their stakes from Guangdong Steel Group.

- Taiwan’s China Steel raises October and November prices by an average 1%
Taiwan’s largest steel producer has said that it will raise domestic prices for October and November by an average 1% from September, principally due to higher commodity prices.

- Shipping rates rise as Japan rebuilds; with capesize up 26% since 1 July
Shipping rates for dry bulk vessels are being boosted by rebuilding efforts after the Japanese earthquake and tsunami increased imports of iron ore and coal since July, according to Lorentzen & Stemoco. “From our perspective, the market is better positioned for a recovery now than at any time during the last three years”.

Hire costs for capesize vessels have risen 26% since 1 July, adds the Baltic Exchange. Similarly, through 24 August, it notes that the cost to hire capesize vessels (which haul iron ore and coal) have climbed for 11 consecutive day to the highest level this year. For example, average daily capesize rents hit $19,010 last week, the most expensive since 24 December. Rents for the ships - which account for 40% of dry bulk fleet capacity - have rallied this month as higher commodity exports helped relieve a vessel glut. The surplus caused average rents to collapse to the lowest level since 2002 in Q1 and Q2 of this year.

However, trading in forward freight agreements, used to hedge the cost of shipping dry bulk commodities by sea, suggests rates may be peaking, according to RS Platou Markets. For example, October-to-December capesize contracts last week were trading at $14,500 to 14,700 per day.

That said, some spot voyage prices for capesize have soared to over $40,000 in recent days as, says Dahlman Rose, the cost of iron ore produced in China was higher than imports for the first time in the current year.

- BHP Billiton sees 2010-11 net profit rise 86% to $23.6 billion
The World’s largest mining company’s annual net profit rose 86% to $23.6 billion on the back of dramatically higher prices for iron ore and copper; market expectations were clustered around $22 billion. Revenue, meantime, for the year was up 35.9% to $71.7 billion which meant a spectacular lift in margins from 24.1 to 32.9%.

BHP said the strong performance was the result of rising prices for its key commodities which reflected high levels of demand from emerging markets such as China - and tight supply. BHP also said that it expects “robust demand” in the short and medium term, but warned that cost pressures could hurt its earnings further out.

The Company added that it expected weak growth in Europe and the US. That said, recent turbulence had not significantly dented demand overall and the Company said it continued to see a strong outlook longer term, underpinned by emerging market demand and barriers to the expansion of supply as miners are hit by funding constraints and labour and equipment shortages.

“The junior (producers) will once again not bring on the volume growth that is being fed into analyst forecasts”, said CEO Marius Kloppers. The constraints squeezing these junior suppliers are likely to prompt deals, but BHP will focus on base metals, oil and gas and potash - sectors where any deals are less likely to face regulatory hurdles. “The balance sheet has capacity for sizeable acquisitions. Opportunity has always been the limiting factor”.

Turning to costs, BHP said labour and equipment increases cut earnings by $1.2 billion in the year to June. Nor did currency help and the weakness of the US dollar against the Australian dollar, together with inflation, took a $3.2 billion bite out of full year operating profit. That said, BHP said it was “congenitally” opposed to currency hedging. “The prices rises that we have seen on the revenue side lag between six and 12 months, and we were going to see them on the cost side in due course”.

Costs excluding inflation and currency movements rose 5% in the year to June, compared with zero growth the year before. However, Kloppers declined to give a forecast for 2012, although they are expected to increase.

Nonetheless, “we remain positive on the longer term outlook for the global economy. Over the past decade, emerging economies have contributed more to global growth than the developed world and we expect their share to expand as the process of urbanisation and industrialisation continues”.

- BHP says it will stay with long term contracts for iron ore
Turning to iron ore, the World’s number three supplier said it was linking the majority of its sales to monthly average spot prices but continued to negotiate long term contracts for supply volumes. This after, it led a drive in 2010 to disband a 40 year old system of pricing iron ore once a year - in the face of opposition from customers in China. Kloppers also said that on a FOB basis, BHP’s sales were running “very close” to record high prices. Note, too, that iron ore is its largest division and income here last year soared by 122% to $13.3 billion.

- Sesa Goa says Indian iron ore mining has impacted performance
Sesa Goa, which is owned by Vedanta, has said that its performance will be affected by an order from India’s Supreme Court extending a ban on mining to two more districts of the key iron ore producing regions of Tumkur and Chitradurga in the southern Indian state of Karnataka. The two account for some 7% of India's estimated 213 million tonnes of annual iron ore output and the ban could impact exports from the World’s third largest supplier.

- Quebec seeks to attract Japan and China to invest in $80 billion regional plan
Companies from Japan and China are considering investing in an $80 billion regional development plan - “Plan Nord” - in Canada’s resource-rich Quebec province, said Premier Jean Charest; with the focus on iron ore, rare earths and lithium deposits, as well as in infrastructure. Xstrata (nickel) ArcelorMittal (iron ore) are already there and the Chinese are reported to be “very interested” in iron ore (and the CICC has an office in Toronto).

ArcelorMittal is also on record (May 20) as saying that it will spend $2.1 billion to expand its Quebec iron ore facility and Xstrata, earlier this month, said it would invest a further $510 million in its nickel mine in the Province.

Quebec has also set aside $500 million (over the next five years) to purchase equity in new mining projects; but would not seek controlling holdings.

- USIM intends to bid for new Brazilian port site as it aims to quadruple iron ore output
Usinas Siderurgicas de Minas Gerais (USIM), Brazil’s number two steelmaker is looking to quadruple its iron ore production, and would very much like to win the auction for the site of a proposed $1 billion port terminal in Rio de Janeiro state.

The State government will ask for bids later this year for a lease on the so-called Area do Meio, which covers some 245,400 square metres, from companies which plan to ship the ore, Brazil’s largest export. At this time, too, USIM does not own a dedicated iron ore port facility. And, the capacity of Area do Meio will initially be 25 million metric tons per year, with capacity to expand to 44 million. Other bidders may include CSN, the third largest Brazilian steelmaker and MMX Mineracao & Metalicos.

Brazil, the second largest exporter after Australia, will boost its output to 771.5 million metric tons in 2015 from 372 million in 2010, according to estimates from the Brazilian Mining Institute. Last year, some 84% of Brazil’s iron ore output was exported for a total of $29 billion, with China buying 45% of it.

USIM's mining unit, Mineracao Usiminas, controls four mines in the Serra Azul region of Minas Gerais; and Sumitomo bought 30% of the unit for $1.93 billion last year. USIM exported 526,000 metric tons of iron ore in 2010, less than 8% of its total production, through a terminal in Itaguai operated by CSN and next to the Area do Meio. It is also reported that USIM may team up with ArcelorMittal.

Note, too, that USIM is 27.8% (voting shares) owned by Nippon Steel; and during 2011, CSN has built up a stake of some 10% in its domestic rival.

- South Africa’s Assore doubles net profit to $440 million
The South African miner said that net profit for fiscal 2011 more than doubled to Rand 3.2 billion ($440 million) on increased demand and higher prices. Sales, meantime, rose 48% to Rand 11.2 billion which meant a first class shift in profitability from 19.8 to 28.6%.

Assore, with partners, spent Rand 2.8 billion to develop infrastructure at the Khumani Iron Ore Mine which should allow the production of 16 million metric tons per year by mid-2012, up from 10 million tons now. It also said that demand in the iron ore market is tight.

In addition, Assore mines manganese and chrome as well as producing ferroalloys for the steel industry; and it expects challenging conditions for the first two.

- Macarthur Coal backs sweetened joint Peabody and ArcelorMittal bid
Peabody Energy and ArcelorMittal have increased their joint takeover bid for Macarthur Coal by 3% to A$4.9 billion ($5.2 billion) and, thus, have secured the backing of the Australian miner for the offer after rivals failed to emerge. Macarthur is the World’s largest producer of pulverised coal; it has also fought off four takeover attempts over the past three years. For the record, PCI - pulverised coal injection - is used as a replacement for coke in the production of pig iron.

Note, too, that Citic Resources, which owns 24.5 % of Macarthur, has made no comment thus far. However, the offer from P/AM only needs 50.1 % of acceptances.

- Severstal triples Q2 net profits and leaves rivals behind
Russia’s largest steelmaker has reported that Q2 net profit more than tripled from $192 to 602 million, driven by strong mining assets and recent divestments (including the Sparrows Point mill in the US). The Company, controlled by billionaire CEO Alexei Mordashov, is benefiting from a vertically integrated structure in coking coal and iron ore, where prices have soared. In fact, the mining unit generated a 47% EBITDA margin.

Magnitogorsk Iron & Steel Works (aka MMK), Russia’s third largest producer, also reported on Friday and its Q2 net profit fell from $53 to 13 million, down from $53 million last year. A day earlier, Novolipetsk Steel, Russia’s number four, reported Q2 net profit up 28% at $587 million. Unlike Severstal, however, both NLMK and MMK must purchase some of their coking coal and iron ore supplies on the open market.

Both Severstal and MMK sent out some positive signals about pricing in the steel market going forward. For example, Severstal CFO Alexei Kulichenko said that prices very likely bottomed in the current quarter. “After that (May) prices actually went down significantly, and from June, July and I would say August, were on what we believe was the bottom level”. Severstal also said that in Russia, its largest single market, “real steel demand in Q3 is expected to remain firm across all steel consuming sectors due to a recovery in fixed capital investments and seasonally increased construction activity”. MMK, meantime, said it expects “positive momentum to recover in H2 2011 with respect to both demand and steel prices”.

- IRC reports its first ever profit as iron ore sales commence from Russian facility
IRC, a Hong Kong-listed iron ore company mining in Russia, reported its first ever profit after its first sales from the Kuranakh mine; prices also rose.

Net income for the six months ended 30 June was $3.6 million, compared with a loss of $51.9 million a year earlier; while revenue increased to $60.4 million from $5.2 million.

IRC began sales from the Kuranakh project, which ships iron ore to China, in the second half of last year. IRC plans to produce 750,000 metric tons of iron ore concentrate this year, with 400,000 tons of that to be mined in the second half of the year. IRC’s average realised iron ore concentrate price rose 12% in the first six months.

- Fleming Family may invest $2 billion in Russian iron ore
It is reported that Fleming Family & Partners, a UK private equity firm, may invest $2 billion to develop iron ore deposits in the Chelyabinsk region of Russia.