Iron & steel weekly: L.I.F.E.G.O.E.S.O.N.

“What you don’t have now will come back again. You’ve got heart and you go in your own way” sings my favourite band of the summer Noah & the Whale; and on such young shoulders rests much wisdom. We all know that the current turmoil in financial and commodity markets (let alone on the streets of Great Britain) will not last; just as a new record gold price of $1,817.60 won’t either.

Similarly, amid these seismic shifts, there are also pockets of rationality with one being the iron ore market and its relatively stable prices. A fact underlined, too, by World Number One, Vale, ably supported by Number Three, BHP. This is not to mention the United Nations whose Conference on Trade and Development says iron ore will be short supply until at least the end of 2013 (and maybe longer). It also says that the oligopoly in supply is a good thing.

Meantime, Baosteel is raising prices next month ahead of the traditional seasonal rise in demand in China. What's more domestic steel production is ahead 10% in the first seven months of the year, with iron ore imports running 7.9% to the good. Finally, the Singapore Mercantile Exchange has just launched the World’s first international/US dollar-based iron ore futures contract due to rising demand for such a service.

- Baosteel raises prices (as does US Steel)
Baosteel, China’s largest by market capitalisation, says it will raise prices in September by Yuan 60 to 90 per metric ton in anticipation that demand will rise. “The traditional peak consumption season is approaching, and demand for flat steel products will improve in September” said Custeel.com. Others producers are likely to follow on price.

Meantime, in North America, the World’s eighth largest producer, US Steel has also announced September price increases of $60 per ton, which is about 10% (note, however, August prices to date are down some 9%). Steel Market Intelligence also senses a turning point “we suspect we are at the bottom in steel prices, and expect an inflection point in coming weeks, as Europe and the Middle East come back to work”.

- China’s steel production in July rose by an annualised 16%; with iron ore imports ahead 6.4% (prices remain firm)
In China, daily steel production has been at more than 1.9 metric tons since February; global economic uncertainty withstanding. And this includes, a month on month dip of 1% in July (to 59.3 million tons) due to electricity supply issues; but July was still 16% up year on year (and production an annualised 10% better in the first seven months of the year to 410.4 million tons). In May, production hit a record of 60.3 million tons.

On the raw materials front, China increased iron ore imports by an annualised 6.4% in July (and 6.8% month on month) to 54.55 million tons as steelmakers began to replenish stocks with a view to a seasonal uptick in demand. Note, too, that in the first seven months of 2011, imports increased by 7.9% to reach 388.63 million tons.

Prices are also firm and the cash cost of 62% iron ore arriving at China’s Tianjin port has risen for five straight weeks (and 71% in the past two years) through 5 August, according to Steel Index. However, prices dipped 0.06% on 8 August to $178.10 per ton and again (0.2%) on 9 August to $177.8, which is neither here nor there. The record was set in February at $191.90.

- Big two remain confident on China
Vale and BHP also remain confident with the former’s CEO Murilo Ferreira saying that he expects iron ore prices to remain “strong” because of demand in emerging countries such as China and India. Iron ore prices are not changing amid the rout in equities and commodities markets worldwide, he added. “Nations with large populations and rising middle classes will continue to demand commodities. These countries have a big hunger for raw materials so I believe the market will continue strong. If we continue this trend, we will have the third consecutive quarter without altering prices”. Vale’s iron ore prices averaged $145.30 per ton in Q2, an increase of 58% from the same period a year earlier.

Similarly BHP Billiton Chairman Jac Nasser says China will continue to grow at 7 to 9% but “we will see only low growth levels for the US and Europe for as far out as we can see”.

- UN says iron ore will be in short supply until at least 2013
The United Nations has also put its hand up and said that iron ore will remain in short supply until at least 2013 and possibly longer, according to its recent Conference on Trade and Development. New projects will add at least 500 million tons and “probably” over 600 million tons of capacity by the end of 2013, which is the earliest time when supply and demand will be brought into equilibrium.

“In spite of a massive pipeline of investment projects, the market will remain tight over the next couple of years because the large iron ore producers can implement their expansion plans with a great deal of flexibility”.

Iron ore use is forecast to increase to 1.91 billion tons in 2011 and to 1.99 billion tons in 2012, from 1.82 billion in 2010. Meantime, production reached a record 1.83 billion in 2010, up 17.6% on the previous year. The UN also says that the big three - Vale, Rio Tinto and BHP Billiton - controlled 58% of the 989 million ton World seaborne iron ore trade in 2010; and the ability of these three (who also controlled 35% of World production in 2010) to regulate the pace of projects will prevent overcapacity. Finally, the price of iron ore will “decline slowly” reaching a “floor” of $110 to 120 per ton delivered to China.

- the futures bright
A further reflection of a robust market comes from the Singapore Mercantile Exchange which has launched an iron ore futures contract. It will be the World’s second for iron ore price hedging after two exchanges in India launched the first in January. Unlike the Indian contracts, however, which are denominated in Rupees and are limited to domestic players, the SMX contracts will be priced in US dollars and open to global investors.

- Japan, Australia, South Africa and Lapland
Elsewhere, steel demand in Japan will fall short of expectations as political wrangling holds up cash injections. The estimated reconstruction bill after the earthquake (nine on the Richter Scale and an astonishing 120 seconds in duration) and mammoth tsunami (including the worst nuclear power station crisis in 25 years) runs to $220 billion.

A ways further south in Australia, Angang Steel’s Pangang Group Steel Vanadium & Titanium says it will invest more than $300 million in its Karara iron ore mine project in Western Australia. Its 50:50 partner Gindalbie Metals will add the same amount. It is reported that, based on trial operations, Karara is forecast to produce approximately 2 million tons of hematite in 2012.

In the same country BHP Billiton, the World’s largest mining company, has elected to absorb its Western Australian iron ore contracting unit from Leighton for $735 million. The purchase is in line with BHP’s intention to move to owner-operator mining.

Then on Saturday in South Africa, Kumba Iron Ore workers marched in the Northern Cape Province to protest over safety issues, according to the National Union of Mineworkers. “This is part of the build-up towards the national day of mourning which will be held on 4 October when mineworkers will down tools in pursuit of their demand to be safe”.

Finally, the wonderfully named Beowulf Mining has announced that the Kallak South drilling programme in Sweden’s Lapland has been completed – and indicates a find of over 400 million tons of 30% Fe iron ore. It will now look in north and south Kallack.