Iron & steel weekly: Wilde about ore

In Lady Windermere’s Fan, Act 3, Oscar Wilde wrote that a cynic is a man who knows the price of everything and the value of nothing. However, this said non-believer would have his work cut out for him in the iron ore market; save for the overwhelming conclusion that the price is going up. For example, ArcelorMittal South Africa said the price rose 23% in H1, while Kobe Steel has its money on a 15% lift in Q2 (to $169 per metric ton) versus a year ago and Hyundai Steel paid 25% more Q2 on Q1. Meantime - Value - sorry Vale, the World’s number one producer, said that its price of iron ore was 58% up in Q2 against last year at $145.30 per ton. Finally, Morgan Stanley reckons that for the full year the average will be $170 in 2011, up from $122 last year - an increase of 39%.

More precise is Metal Bulletin which, on Thursday, said the price of 62% iron ore delivered to China rose 19 cents to $175.45 per tonne, which is the highest since 19 May. This is due to some local difficulty in India, which is the World’s number three geographical producer (after Australia and Brazil). Here, the Supreme Court has banned mining in the key iron ore region of Karanataka, which accounts for around a quarter of India’s export. You will recall, too, that last week I referenced a Reuters opinion poll which suggested that Indian iron ore exports could fall by a fifth to 71.25 million tonnes in the year to March 2012; with the Federation of Indian Minerals Industries estimate at 64 million tonnes.

- Vale
Elsewhere, the World’s largest iron ore producer, Vale, posted its Q2 net income on Friday (CET); and despite a 74% surge to $6.45 billion, net income missed analysts’ estimates by around 14% due to a weaker US dollar and rising new project construction costs. To make up for this, though, the company paid an extra dividend of $3 billion or 57.7 cents per share (in fact Vale will spend $11 billion on buy backs and dividends this year). In the same period, net sales rose by a hefty 55% to $15 billion in the quarter, helped by an increase in output of almost all products. In turn, this means a truly astonishing net margin of 43.0% (versus 38.3% last time, which was none too shabby itself).

In total, Vale produced 80.3 million metric tons of iron ore in the three months through 30 June – an increase of some 6% year on year. Regionally, a third of its revenue came from China, up from 30% in Q2 and 28% on last year. The Company is benefiting particularly from higher iron ore prices (as above).

Vale’s plan, however, to operate a $2.3 billion fleet of giant iron ore freighters has proved unpopular in its largest market; and China’s largest shipping companies are lobbying the Government to sink this maritime initiative. For example, Zhang Shouguo, Executive Vice Chairman of the China Shipowners Association (CSA), says that Vale should hire shipping companies to run the new prospective fleet of 19 directly-owned vessels with individual capacity of 400,000 tons (known as Valemax’s) plus another 16 under long term contract. “Vale is seeking to control the freight market as it has done with iron ore prices” added Zhang. Note, too, that the CSA, which represents 85% of China’s total shipping capacity, may also seek Government help to determine whether or not Vale will breach Chinese regulations.

- ArcelorMittal
Earlier in the week, it was the turn of the World’s largest steelmaker to report Q2 numbers (it makes some 7% of the World’s steel - double that of number two). In the three months to 30 June, ArcelorMittal (AM) saw net profit fall 11% to $1.54 billion; however, when discontinued operations are removed, net profit was down just 3%. Sales, meantime, went the other way with a 25% price-based rise to $25.1 billion from a year earlier and 13% from Q1 (with volumes static at 22.2 million tonnes). In turn, this meant a cost-induced squeeze on net margins from 7.9 to 6.1% (this is one seventh of Vale’s return).

However, AM has been working towards a greater level of self-sufficiency in iron ore (and coal). In Q2, its in-house iron ore production rose 11% on Q1 (with coal up 7%; and, at this time, AM is battling jointly with Peabody to buy Australia's Macarthur Coal worth in excess of $5 billion). In 2010, the Company increased iron ore output 30% to 48.9 million tons and plans to expand this by at least a further 10% this year.

The Company also expects higher volumes in H2 with demand from China and the auto industry ensuring no repeat of the sharp slowdown seen in Q3 last year. For example, steel consumption in China, not a main market for AM but key in the dynamics of price and demand, should rise by more than 8.5% this year, it says; meaning global sector expansion of 7.0 to 7.5%.

To be fair, other producers are less sanguine, especially US Steel, AK Steel and Nucor – all in the US. Similarly, South Korea’s Posco is cautious too. Raw material costs (iron ore and coal) are the number one issue.

- Sierra Leone
On a brighter note, African Minerals had risen some 7% to 662 pence per share by lunchtime today after saying China’s Shandong Iron & Steel will invest $1.5 billion for a 25% stake in the Tonkolili iron ore project in Sierra Leone. Shandong, the World’s ninth largest steel group, will buy iron ore at a discounted price under an off-take agreement and retains the option to buy up to 25% of the project’s annual iron ore output. For the record, African Minerals is listed in London and is the largest company on AIM with a market capitalisation today of £2.2 billion.

- Gold
Finally, given that the US isn’t going bust (just yet), the gold price paused for breath and, at the time of writing, it was $1624.60 (down from Friday’s intra-day record of $1637.50).

“The truth is rarely pure and never simple” - Oscar Wilde