Iron & steel weekly: 800 million

This is the amount in tonnes of additional iron ore that the World needs through 2019, according to the number two player Rio Tinto – which neatly breaks down to an average 100 million per annum for eight years; and I certainly hope so. Good job then (and not talking its own book at all) that Rio’s Simandou iron ore project in Guinea is on track to make its first shipment by mid-2015. Note, too, that this is a joint venture with Chinalco, aka the Aluminium Corporation of China.

 - Non-traditional
In case you had forgotten, China is the World’s largest iron ore consumer and, it follows, the number one national in steel. This means, too, that it must source product from both traditional (Australia, Brazil and South Africa) and non-traditional sources (everywhere else, including Guinea).

For the record, too, (the wonderfully named) Xu Xu emphasised this at a recent conference. He is Chairman of - wait for it – ‘the China Chamber of Commerce of Metals, Minerals & Chemicals Importers & Exporters’ and said that in H1 2011 iron ore imports from countries other than Australia, Brazil, India and South Africa reached 64.63 million tonnes. This is 19.3% of total imports and up some 4% from a year ago. Xu also went on to say that this rising share indicates that the traditional position of Australian and Brazilian miners, in particular, is being challenged.

Furthermore, China continues to look more at the likes of Peru, Chile and Canada where it should actively develop strategic relationships with iron ore exporters, he said. The same goes for Russia, Vietnam and Kazakhstan. Xu added, that the proportion of Indian ore imports to China reduced by almost 15% in H1 - the largest proportional decline in 13 years. Domestic constraints on mining are a factor here. Nor should China’s domestic iron ore production be forgotten and, in the first seven months to end July, it rose 22% to 691.9 million tons.

- August prices rise
 Whether traditional or not, the price of iron ore imports continues to ignore what is happening in World bourses - and tonnage for August delivery rose to the highest level since 6 May ($191.90), according to The Steel Index. This means that 62% iron ore fines ended the month at $179.9 per ton in Tianjin.

Similarly, trading in iron ore swaps climbed 50% to a record in August, according to The Steel Index. Investors bought and sold derivatives corresponding to more than 6.5 million metric tons, up from 4.3 million in July, and worth a nominal value of $1.1 billion. Meantime, in the period January to July, says CISA (the China Iron & Steel Association), the average price of iron ore imports gained 37.8% to $162.7 per metric ton. Unsurprisingly, too, this added Yuan 137 billion in costs to the Chinese steel industry.

- Steel margins
In turn, the profit margin of 77 large and medium Chinese steelmakers was just 3.08% in the first seven months of this year, down 0.1% from a year earlier, added CISA. It also described steel making as a high cost, low profit sector compared with the industry in general where the average profit margin is 5%.

However, for his part, Baosteel’s General Manager, Ma Guoqiang Ma says that the Sector was still facing risks from the growing “financialisation” of iron ore prices and the Company is still looking to resolve the monopoly of supply by investing in overseas iron ore mines at a proper time. He also expected little opportunity for steel prices to rise or fall significantly in Q4 - due to still high iron ore prices and the lack of remarkable growth in steel demand.

- CISA's iron ore price index
In order to keep better track of raw material prices, though, CISA will begin publishing a weekly iron ore index on 1 October. “We are able to collect data from all domestic mines and 35 ports nationwide” said Luo Bingsheng, Deputy Party Secretary of the Association, which represents China’s 77 biggest mills. He was speaking at a conference. Quarterly iron ore prices are usually based on figures derived by deducting freight costs from the three month average of daily iron ore indices compiled by Platts, The Steel Index and Metal Bulletin with a one month lag period.

Steelmakers, including Baoshan, China’s largest listed producer, typically use Platts. “It isn’t mandatory for steelmakers to replace other price indicators” said Luo. “But an index launched by the steel association will be well received by its members”. Nonetheless, the Association’s index, which will consist of domestic and import prices, will “more truthfully reflect China’s market reality and guide orderly imports”, added CISA Vice Chairman Zhang Changfu.

- Partnerships
One way to ameliorate the situation is to work together and the World’s number one in steel, ArcelorMittal and Hunan Valin, China’s number 10 producer, will accelerate a strategic partnership for the production of high end steel products in China plus a target lowering of HV’s costs and an initiative on better purchasing of its iron ore. The two will also push ahead with new auto sheet and electrical steel projects. For good measure, too, AM owns a touch under 30% of HV, which is listed in Shenzhen and is 40.01% by Hunan Valin Group. This latest announcement also comes very quickly after CISA and the local securities regulator in Hunan said that AM had failed to fulfil its commitments to HV. In addition, AM agreed to sell its 12% stake in an auto sheet joint venture with Baosteel and Nippon Steel to the Japanese firm so as to be free to focus on its work with HV.

- Shipping bottom
In the less good news department, Lorenzten & Stemoco says that the slump in dry bulk shipping rates may have ended. This comes after Rio Tinto paid the year’s highest rent ($10.30 per metric ton) for a capesize vessel to carry iron ore to China from Australia. Indeed, the rate paid is 31% more than on 2 August, says the Baltic Exchange and is the highest since 11 November. Furthermore, the number of contracts used to hedge capesize rents for Q4 of this year has jumped 42% since end August and forward freight agreements, by value, have added as much as 13% (to $18,925 per day), according to Clarkson.

Similarly, US investment bank, Dahlman Rose, says that hire costs of capesize ships will rise by a further 25% as exports from Brazil to China drive prices up. That said, trading in freight derivatives, used to bet on the cost of shipping raw materials such as coal and iron ore, fell 13% last week to 27,318 from a 19 month high according to Oslo-based NOS Clearing, Singapore-based SGX AsiaClear and London’s LCH.Clearnet.

The global steel industry is the single most important customer of dry bulk shipping, with iron ore, coking coal and steel products accounting for 51% of seaborne trade, estimated at 3.56 billion metric tons for 2011, according to DVB Bank. What is more, a total of 1,267 capesize ships comprise 40%, by number, of the global dry bulk fleet of 8,603 vessels, according to Clarkson. But too many new ships were ordered when rates boomed and this depressed hire rates; and, while there has been some recovery, Bank of America Merrill Lynch says that demand is unlikely to catch up with supply until 2014.

However, iron ore shipments booked in capesize vessels tracked by Clarkson reached the highest monthly tally of this year in August at 76, which compares with 58 in July, and 71 in June. For the record, too, some 70% of the forecast exports of 1 billion tons of iron ore in 2011 will be shipped from Brazil and Australia, according to Clarkson.

- Valemax
The World’s largest exporter of iron ore is in talks with Chinese shipping companies to operate its new, massive iron ore carriers under long term contracts as they run from Brazil to China. However, China’s largest shipping companies are lobbying the Government to stop Vale and its plan to build a $2.3 billion fleet of the World’s largest carriers. Similarly, Chinese regulators have not yet approved any of its ports to harbour more than 300,000 dead weight tons for dry bulk carriers because of safety and environmental concerns; Valemax’s weigh in with a gargantuan capacity of some 400,000.

- Brazil, Afghanistan, Nigeria and Cockatoo Island
Brazil’s iron ore shipments in August reached the highest level (32.5 million metric tons) in more than three years and are up by 8.9% on the same month last year.

In the same country, a Chinese consortium (including Baosteel and CITIC) has bid $1.95 billion for a 15% stake in global leader in niobium. Companhia Brasileira de Metalurgia e Mineracao has an 82% share of the global market for niobium which is one of the five major refractory metals (with high resistance to heat and wear). It is used with iron and other elements in stainless steel alloys and also with a variety of nonferrous metals, such as zirconium. Niobium alloys are strong and are often used in pipeline construction, jet engines and heat resistant equipment. Niobium is also used for jewellery and, at cryogenic temperatures, is a superconductor. Posco, Nippon Steel and others hold another 15%.

Meantime, in Afghanistan, the Steel Authority of India and JSW Steel are among seven Indian steel and mining companies which are bidding jointly for the Hajigak iron ore mines, it is reported. Reserves here may be as large as two billion metric tons of iron ore with a capital budget of some $3 billion over 30 years.

Then, down in Nigeria, Reuters says significant production should begin at the Itakpe iron ore deposits next year. Reserves are reported to be three billion metric tons with an initial annual output target of two million tons.

Not forgetting Cockatoo Island (“only in Australia”), where Pluton Resources has signed a deal with US-based Cliff Resources and its joint local partner to acquire these iron ore assets in the Kimberly region of Western Australia. The consideration is reported to be that Pluton will assume liabilities for environmental rehabilitation of the island. At this time, production is said to be approximately 1.4 million tons of high grade iron ore fines per annum.

- Chapter 11
Finally, Iron Mining Group Inc has filed for reorganisation relief under Chapter 11 in New York due to a dispute with its senior secured lender, Globe Speciality Metals. That said, its foreign subsidiaries continue to conduct business as usual and have contracts to export 480,000 million tonnes of iron ore by the end of 2011. IMG is a global iron ore trading group with direct mining operations in Chile and Mexico, where it owns a number of iron ore projects in various stages of development. China is its prime destination focus as the Nation looks to non-traditional sources.