Iron & steel weekly: “keep calm and carry on”

This was the strap line on a poster produced by the British government in 1939 at the beginning of WW2. It was intended to raise morale, but in the event was little used. It has, however, had a new lease of life in more recent years; and still means the same.

Okay, you can’t ignore the background noise of possible economic calamity and equity market routs; or gold at $1894.80 (at the time of writing). Nonetheless, given the news flow in the iron and steel sectors, there has also been a remarkable insouciance.

For example, Macquarie says that because of demand in China, iron ore supply won’t keep up with it – even with zero growth in Europe and North America. Similarly, CISA says steel demand in China is expected to remain robust; it also says that while China only owns some 10% of its imported iron ore at this time – it should be 50% in five to 10 years.

Following on from Baoshan, China’s leading steel mills are also raising prices for September, which reflect both the spot market and expected demand levels. Fortescue Metals, Australia’s number three iron ore producer, produced a 77% rise in annual profits (to $1.02 billion) and said it was confident about long term demand in China; it sells most of its product here. That said, it did admit that tighter credit conditions have slowed orders a bit.

Meantime, in South Africa, Kumba and Sishen (74% owned) are embroiled in a legal dispute over the ownership of a disputed mining licence which used to belong to ArcelorMittal but is now in the hands of ICT, which has indirect links to South Africa’s President. This is an iron ore soap opera.

Exxaro Resources (which owns 20% of Sishen) has also produced figures, this time for H1 in which it saw net profits rise 33% to $445 million. Additionally, the Company said it would like to be more involved in directly-owned iron ore production; and would even consider raising equity to do so.

The World’s largest ferrochrome producer, ENRC, was another corporate which enjoyed a good first half (net profit up 29% to $1.17 billion) and it appears to be coming to grips with its corporate governance issues. The Company is also investing in iron ore assets and this product accounted for 43% of its EBITDA in H1. ENRC is also seeking to produce 19.5 million tons of iron ore by 2014 and 45 million tons by 2016.

Finally, keeping calm are African Minerals, Renova/East One, Cliff Resources and Anglesey Mining; while Magnitogorsk/Atop and Minmetals/Sinosteel are carrying on. See below.

“You better think about the future, for it's where you will spend the rest of your life” - Anon

- Iron ore demand in China exceeds supply (still)
Demand in China, the biggest consumer of metals, will keep iron ore markets in deficit this year and next year, even in the event of zero growth in Europe and North America, says Macquarie. Earlier, Wood Mackenzie is on record (last month) as saying that iron ore prices are set to stay at “elevated” levels until at least 2015 because of short supply. However, Citigroup has (as of last week) lowered its three month iron ore forecast to $160 per metric ton.

- CISA expects steel demand to remains strong
Steel demand in China is expected to remain robust as the World’s second largest economy aims to maintain strong growth boosted by its continued investment in urbanisation and industrialisation, according to the China Iron & Steel Association (CISA). “The engine driving up China’s economic growth will still be powerful due to rapid investment growth, which will support steel demand in the near future”. CISA also expects that China’s steel exports will continue to stay relatively high, supporting steel demand. China’s economy should grow 9.2% in Q3, slightly down from the first two quarters of the year, according to the NDRC, but still not bad at all.

Inventories of five main steel products: hot rolled coil; cold rolled coil; plate; wire rod; and rebar fell for the fourth straight month by 3.24% to 13.85 million tonnes in 26 major cities by end of July from the previous month.

“Large-scale construction of social housing and water conservancy as well as railway projects will continue to boost demand for construction steel products, while flat steel product mills will face growing competition as its end users including shipbuilding, auto and machinery see slower growth”.

Data also show that rebar spot prices rose 0.85% at the end of July from a month earlier. Meantime wire rod added 1.51% to its price and hot rolled coil +0.43%; albeit most other steel products fell modestly in the month. “Chinese steel mills will still face high production costs in the near future, narrowing the room for prices to fall in a large way”.

Prices of spot iron ore gained 1.5% in July from June, while coking coal prices jumped 2% from a month earlier.

China owns 10% of its imported; and this should be 50% in five to 10 years (CISA)
China currently owns less than 10% of its imported iron ore (618 million tonnes last year); and it should seek 50% from Chinese-invested overseas sources in the next five to 10 years, according to Li Xinchuang, Deputy Secretary-General of China Iron Steel Association (CISA). These comments were reported in the China Daily last month wherein Li said China would be able to break the hold of Rio, Vale and BHP on supply and pricing only if it can source half its overseas ore from Chinese-invested mines.

- More China steel mills raise September prices on demand
More of China’s leading steel mills have announced price rises for their main products for September in order to both catch up on the spot market and in anticipation of stronger demand next month. Fort example, Wuhan Iron & Steel and Beijing Shougang, will raise September prices for their main flat steel products in the wake of a similar move by Baosteel the week before; the latter is pretty much the domestic price leader.

“Price rises by steel mills reflect climbing prices in the spot market since the end of July as steel mills received strong bookings in August. Steel prices are expected to increase next month as traders and end users need to build up stocks as demand improves” said Timing Steel.

Wuhan Steel, the number three producer, plans to increase hot rolled coil prices by Yuan 100 per tonne and cold rolled by Yuan 120 per tonne; which is in line with Baosteel. Similarly, Shougang will lift cold rolled coil prices by Yuan 50 per tonne, but has yet to make a decision on hot rolled. Angang Steel is expected next.

- Fortescue CEO says tight credit conditions are slowing orders for iron ore in China; but the long term picture remains rosy
Fortescue Metals Group, Australia’s third largest producer of iron ore, said tighter credit conditions in China have slowed orders from steel mills; and this as it reported full year net profit up 76% to $1.02 billion. “While we’ve not had any impact on a month-to-month basis, we have seen perhaps a cooling off as you look forward in the market” said CEO Nev Power.

Nonetheless, the Company, which sells almost all of its ore to China, also expects iron ore markets to stay strong. “Looking at the next five years, the Chinese 12th Five Year Plan is still very intensive in steel consumption and demand” added David Liu, Fortescue’s Head of China Sales and Marketing. “So we still see underlying requirement for steel to remain very, very strong”.

Fortescue’s average price for iron ore in the fiscal year to 30 June rose 68% to $149 per ton.

- Kumba denies it has committed fraud over South Africa mining license application
Sishen Iron Ore Company, a 74% owned unit of Kumba Iron Ore, has denied committing fraud in its application for a disputed mining license which was awarded to a rival, Imperial Crown Trading (ICT).

“The submission that Sishen Iron Ore has admitted to fraud is quite frankly absurd” Chris Loxton, Kumba’s lawyer, told the North Gauteng High Court in Pretoria last week. However, Willie Vermeulen, the Department of Mineral Resources’ Senior Counsel has said that Sishen arranged with an official to date its rights application 1 May 2009, a day after it submitted the proposal. The date is significant as the 21.4% share that had been held by ArcelorMittal South Africa expired on 30 April. The Ministry said it will seek criminal charges against Sishen.

Nonetheless, both Kumba and ArcelorMittal are separately asking the High Court to overturn the award of prospecting rights for the Sishen mine to ICT, whose owners include Jagdish Parekh, a business partner of Duduzane Zuma, son of the RSA President.

ICT’s receipt of the rights was based on “incomplete, manipulated and fraudulent title deeds” according to Loxton. Plus, Kumba says it’s the only party eligible for the rights to the Nation’s largest iron ore mine.

ArcelorMittal lost its rights after failing to renew the title. In turn, prompting Kumba cancelled an agreement to supply 6.25 million metric tons of iron ore at cost plus 3% to ArcelorMittal when it learned the prospecting right was awarded to Imperial.

Kumba is 63% owned by Anglo American and Sishen Iron Ore is 74% owned by Kumba, 20% by Exxaro Resources with the balance (6%) with the locals.

- Exxaro Resources profit climbs 33% on coal and iron ore
Exxaro Resources, the second largest coal producer in South Africa, said H1 net profit rose 33% to Rand 3.2 billion ($445 million) as increased demand for the fuel drove up prices and its share in an iron ore venture boosted earnings. Sales, meantime, rose 22% to Rand 9.6 billion which meant profitability at 33.3% versus 30.5%.

Coal producers in South Africa have seen profits buoyed by higher prices as sales to steelmakers and power plants recover. An improved performance at its mineral sands businesses together with an increased contribution from a 20% stake in Kumba’s Sishen mine boosted earnings with a Rand 2.4 billion contribution ($334 million).

While Exxaro does not produce iron ore itself, it is “constantly evaluating” projects in West Africa and Australia and would consider raising equity funding to buy the right assets.

- African Minerals seeks tighter takeover protection
The largest company on AIM will ask shareholders next month to vote on increasing its takeover protection due to the belief that its corporate profile will rise once it starts producing iron ore. The provisions will be a diluted version of the UK’s Takeover Code; note that African Minerals is Bermuda-registered and, thus, not covered by the Code. Similarly, African Minerals last month appointed Deutsche Bank as its nominated adviser and broker.

The Company expects to start producing iron ore at its flagship Tonkolili project in Sierra Leone this year. Shandong Iron & Steel, the World’s ninth-largest steel group, has agreed to pay $1.5 billion for a 25% stake in the project and African Minerals’ shares have risen 13% so far this year (to 474.25 pence), valuing it at £1.6 billion.

African Minerals’ Chairman is the colourful Frank Timis, a self-made Russian billionaire, who owns 12.4%; with Timis Diamond Corporation holding 12.6%. He is committed to remaining a Director of African Minerals until Phase III development of the project has been completed. Tonkolili is expected to produce 12 million tonnes of iron ore a year at full capacity, rising by 23 million tonnes and by 45 million a year following planned Phase II and III expansions.

- ENRC H1 net profit rises 29% on higher commodity prices
Kazakhstan-based and London-listed Eurasian Natural Resources Corporation, the World’s largest ferrochrome producer, reported H1 profit up 29% at $1.17 billion on sales ahead 32% to $4.01 billion. However, this meant a cost-driven dip in margins from 29.8 to 29.2%. The H1 dividend of 16 cents a share was increased by 28%.

Producers of ferroalloys have seen profits buoyed by rising demand from Asia’s auto, electrical appliance and building sectors. Benchmark European prices for ferrochrome averaged $1.30 per pound in the first half, 9.7% higher than a year earlier, according to Merafe Resources, which part-owns ENRC along with Xstrata.

“We expect the progress in the Group’s financial performance to continue through the second half, although at a slower rate than in the first” said ENRC’s acting CFO Felix Vulis. “Overall group unit costs are expected to rise at around 20% in 2011 in addition to some limited volume growth”. Q2 output of ferroalloys rose 0.8% to 398,000 metric tons and ferrochrome production gained 3.2%.

The Company plans to complete a three month governance review to restructure the board by the middle of September and is committed to remaining a UK-listed company. Shareholders voted on 8 June against rehiring independent directors Richard Sykes and Kenneth Olisa in a corporate governance dispute.

Vulis, who resigned on 4 February and remains in the post while the Company seeks a replacement, would not say whether he would stay on as CEO after the process.

ENRC is investing in iron ore assets to diversify output and extend its geographic reach as Chinese demand for the steelmaking material drives up prices. The Company, which is spending $11 billion to boost output across all its divisions, is seeking to produce 19.5 million tons of iron ore by 2014 and 45 million tons by 2016. The iron ore unit accounted for 43% of the Company’s $1.93 billion EBITDA in the first half of the year and it produced 8 million tonnes of saleable production.

- Magnitogorsk is sued by partner in iron ore unit
It is reported that Magnitogorsk Iron & Steel has been sued by its partner in an iron ore venture after assuming ownership of a license to the venture’s largest ore deposit, according to Interfax. Atop International Group, which holds 49% of the OAO Bakalskoye Rudoupravleniye venture, filed a suit in Chelyabinsk, after the license to the Techenskoye ore field was transferred to Magnitogorsk in May following regulatory approval. A spokesman for Magnitogorsk said he sees no legitimate grounds for the suit.

- Renova in talks to buy Ukrainian metals assets
Russian billionaire Viktor Vekselberg’s Renova Group is in talks to buy metals assets of Viktor Pinchuk’s EastOne LLC, it is reported by Kommersant. EastOne is looking to sell 25% of companies which control three ferroalloy plants and two iron ore processing facilities in Ukraine, including Nikopolsky Zavod Ferosplavov (NFER), one of the World’s biggest iron ore plants. The stakes may be worth a total of as much as $1.5 billion, added Kommersant.

- China Minmetals and Sinosteel face a renewed magnesite price fixing case in the US
China Minmetals Corporation, China’s largest State-owned metals trader, and Sinosteel must face claims they conspired to fix the price of magnesite sold in the US, according to a Federal Appeals Court ruling. The US Court of Appeals in Philadelphia reversed a lower court decision dismissing the lawsuit. The lower court erred in ruling that it lacked jurisdiction to decide the dispute based on a federal statute, the appeals panel said, remanding the case for further proceedings.

- Cliffs Natural Resources in four million share buyback
The largest producer of iron ore pellets in North America has announced that it has approved the repurchase of up to four million of its shares. “Given the recent volatility in the global equity markets, today’s adoption of a repurchase authorisation will allow Cliffs to opportunistically acquire shares at attractive valuations” said Cliffs Natural Resources CFO Laurie Brlas. She also added that the share repurchase programme expires at the end of the year.

- Anglesey Mining’s Labrador Iron signs iron ore deal
Labrador Iron Mines (33% owned by Anglesey Mining PLC) will sell and ship its iron ore production for 2011 to the Iron Ore Company of Canada. Thereafter, it will be delivered to Asia and sold at spot prices based on actual realised prices to Chinese customers. The Company will move the ore from the James mine in north west Labrador by rail to the Port of Sept-Iles in Quebec.