Flash News – Update on previous entries

31 10 2010

This week there were significant developments on issues dealt with in previous entries. Here’s the week in review.

China. In response to the production cuts of metal producers due to restricted power supplies, China’s State Reserve Bureau will be selling some of its inventory to appease the markets. Steel Guru

Labour conflict. After failing to reach an agreement, Newfoundland and Labrador has established an industrial inquiry commission to investigate and make recommendations towards ending the 15-month long labour conflict between Vale and the Voisey’s Bay workers. The Commission is tasked to examine the positions of the parties, the factors influencing the relationship climate, external factors contributing to the dispute , impacts on other labour relations as well as disputes, costs to stakeholders and options to resolve the dispute. The Packet

Potash Corp & BHP Billiton: the politics. Saskatchewan is against the acquisition period. It’s not trying to gain further concessions from BHP Billiton. The New Democratic Party is trying to get the Canadian parliament to adopt a non-binding motion in opposition to the bid. Reuters

Potash Corp & BHP Billiton: the lawsuit. Potash Corp alleges that unsealed internal documents of BHP have shown it was questioning the viability of its Jensen Project but kept telling investors otherwise to reduce Potash Corp’s share price (as an eight-million tonne a year mine Jensen could only flood the market). Potash’s interpretation is based on a briefing saying: it “‘was agreed that the primary objective for Jansen was to reduce the execution risk by ensuring phase one for Jansen had the lowest possible capital number’ and to limit the capital expenditure for that first phase.'” Is that enough of a case? Windsor Star

Hilary Clinton has commented China’s trade restrictions over rare earths in the context of the last ASEAN meeting. Commentary & Analysis





Cyber Attacks on Mining Companies

21 04 2010

Australia’s ABC Television Four Corners program revealed that BHP Billiton, Rio Tinto and Fortescue Metals have been the target of Chinese cyber attacks. An attack against Rio Tinto coincided with Stern Hu’s arrest last July. BHP Billiton was attacked during its attempted takeover of Rio Tinto. As for Fortescue Metals, news of the attack are a bit surprising as the company has struck deals in terms favourable to China last year. While cyber attacks have happened in the past (think Google very recently), these cases cause concerns as they seem to target trade secrets.

The Four Corners’ Chinese Whispers report can be watched here.





STEEL UPDATE

27 01 2010

I am already falling behind with my new year’s resolution. I apologize for slacking. I started writing an entry last week but did not finish it. I got a hand on good market research from Exane BNP Paribas, as well as Nomura Market Research lately and I think that it is worth sharing the wealth.
Essentially, my entry seeks to tell you what to expect of steel in the near-term. Below is a summary principal driving factors for the steel industry.

Cost of inputs

Rising costs of inputs (iron ore and coking coal) has been the most important driver of steel prices lately. The market is sufficiently balanced at the moment to allow producers to pass these price increases to consumers.

Iron Ore

I was perhaps a bit too early to call iron ore contract negotiations in season a couple of weeks ago. After all, discussions and general signalling of intentions have started taking place only lately. Officials from the Chinese Iron and Steel Association kicked off the season with an exercise of out loud wishful thinking when they announced their expectations of a 20-30% rise in iron ore prices. Major iron ore producers would prefer starting negotiations with Japan to establish a price that will later be used as the basis of other negotiations. Doing this in 2009 has allowed them to resist Chinese demands for a lower price. (Interesting commentary here.)

Price Outlook. Analysts at Exane BNP Paribas, Citigroup and Nomura research are expecting that the price of iron ore would increase 30 per cent this year. Goldman Sachs JBWere is slightly more enthusiast as it was reported in the Australian media that it upgraded its iron ore outlook for this year to a 35- 40 per cent increase. Prices for 2011 are assumed to remain somewhat stable (Nomura Equity Research is forecasting an increase of 10% from 2010 levels).

Coking Coal

Steel mills are resuming production just as production cuts of coking coal (think Shanxi region) have taken place. Nomura Equity Research forecasted in an early December report that Australian hard coking coal would rise to 180$/tonne in 2010 and then to 225$/tonne in 2011. As for Exane BNP Paribas it expects a target for coking coal at around 200$/tonne in 2010. I would be tempted to think that these estimates are a bit low as Xstrata has made an agreement to provide some Chinese steelmakers for Q1 at USD 190$/tonne. Taking in consideration that some Australian producers of coking coal are already nearly sold out for 2010, it is fair to expect premiums to be paid to secure supplies.

As raw material prices rise, spot prices are rising faster than contract prices. Producers buying from the spot market (think smaller Chinese mills) will face steeper cost increases and could likely experience a tightening of supply as major iron ore producers have to redirect supply towards benchmark contracts rather than spot markets as restocking takes place in OECD countries.

Steel demand: Catch up vs Real Growth?

Last week signs of fiscal tightening in China have shaken commodity markets due to the widespread belief in Chinese stimulus measures being the main driver of the rally in commodities. Still, China remains an important source of demand as a result of its rapid economic development and urbanization. In 2010, the infrastructure budget of China is expected to grow 15% (from the previous year) and will effectively affect steel demand.

To complement this, many steel users in OECD countries have kept very low inventories in late 2009 and are expected to start restocking very soon. The impact of the US stimulus plan is also expected to be better felt this quarter although Buy American will largely limit the benefit to US mills. These factors lead many to think that even without a recovery steel purchases would be increasing.

However, this will not be enough to call it a recovery. A proper recovery in demand (beyond restocking) from steel users in the construction, car and real consumption is expected only next year. Some see the boom times of 2007 coming back in 2011-2012 although this seems a bit far fetched considering where the industry now stands.

Steel supply

Future supply growth is apparently constrained as high cost steel mills have been idled and capital expenditures slashed as a result of the downturn. In addition, producers in developed countries are sticking to a rather robust production discipline to privilege prices over volume. Still Nomura Equity Research expect capacity utilisation rates to rise from 60 to 70 per cent globally (projection excludes China) in 2010 and to then increase to a “normal” levels 80 per cent in 2011.

Chinese steel production outlook is a bit harder to assess. The country produces 47.5 per cent of global crude steel production. The Government is committed to solve its blatant overcapacity problem; however its grip on the steel industry is loosening as a significant segment of it is now under private control. Progress on that front has been modest has mills have been reluctant to comply.

The threat of Chinese exports flooding market has been the reason many North American and European steel producers did not increase their products’ prices in late 2009. However many analysts do not see Chinese exports as imminent threat. There are two reasons for this. First, production costs are rising faster for Chinese mills and as such prices between developed countries and Chinese products are converging. Secondly the very low inventories in North American and European markets, the longer lead times associated with the purchase of Chinese products may simply be unmanageable from a logistic point of view.





This Entry Talks About Copper

6 01 2010

Well this does not get any more obvious isn’t it? If you are interested in reading about the outcome of the strike at the two Codelco mines in Chile, click here. If you are interested in reading about China’s bid for Corriente, click here.And if the possibility of Novagold’s Galore Creek project resuming is making you happy, clap your hands. Otherwise, let’s get serious.

Where is copper heading this year? In 2009 copper prices increased 140%. Is it fair to expect such a performance to be continuing in the New Year? It depends what factors you are willing to taking into consideration.

It seems the Chinese are still buying copper from the LME and that overall there is a sentiment that this could continue for months. This begs the question: how strong is the Chinese copper demand? Since stockpiling a significant inventory of copper through the State Reserve Bureau in the first half of 2009 and imports have since then slowed down despite the deployment of infrastructure projects.

China is known to be price sensitive and, as prices rose, is suspected to have switched to importing scrap. Considering these factors (namely stockpiling and substitution), assessing the Chinese demand for copper can be tricky.

So far, one assumes that the stockpiles estimated to 400,000-500,000 tonnes are still in storage and have not been released yet. Still firms like GFMS are relying on the production of semi-finished copper products as proxy for Chinese demand for copper. According to GMFS such production has increased by 17% y/y towards the end of 2009 which could indicate that lower copper purchases by China are only temporary.

Reports of China planning on exporting copper have emerged. Some distributors cannot find buyers for refined copper as the local scrap supply is improving. Big players such as the Xi’an Maike Metal International Group have had to re-route some of their inventories to LME warehouses in Korea and analysts at CRU International see this as a continuing trend.

I don’t mean to be overly bleak but if China’s reduced its copper imports by dipping into its inventories, which is what Chile’s Copper Commission is expecting, China’s apparent demand could reduce by 17%. Now if it is re-exports copper, I don’t think that the increasing demand from recovering OECD countries will be enough to sustain copper prices. After all, a major part of the rally in commodities came from Chinese stimulus buying.





Not in your League?

15 12 2009

Just a few years ago companies were bleeding themselves out to acquire aluminium production capacity based on the assumption that demand from China and the increasing importance of aluminium in transportation were solid fundamentals. In September (late in the news, I’m so sorry), Alberto Calderon chief commercial officer from BHP Billiton, said that aluminium was losing its appeal adding that it was “clearly the house view is that aluminium is not in the league of coking coal, iron-ore, copper, potash or petroleum,”.

The reason for such a lack of optimism is the growing production capacity in China. Despite its intention to crack on oversupply, China is self-sufficient in aluminium and will become a net-exporter in the long-term as well. While this does not prevent aluminium production from being a good business, it certainly limits its potential in the short and longer-term. Especially as China has had record production for the last three months as it races to meet annual output targets for non-ferrous metals.

Still, not being in the league of potash is harsh. Potash has faced the most serious decline in its history this year. A recovery is even been postponed to some time in 2010 as farmers are still reluctant to buy and use fertilizers as they still expected prices to fall further in Q3. In the meantime PotashCorp’s Penobsquis mine, one of Canada’s largest potash deposits, will face its fourth eight-week shutdown in January 2010.





The Geopolitics of Rare Earths

9 12 2009

Rare earths elements are used in electronics, in renewable energy infrastructure as well as high-tech military materials. In a way, rare earths are the pillars of next generation technologies. The demand for these metals is expected to grow at such a pace in coming years that obtaining a secure supply could become critical.

Rare earths are a tiny industry. Global demand is of about 125,000 tonnes a year. In the last 10 years, China which currently produces 95 per cent of rare earths increased production from 40,000 to about 125,000 tonne per year. Demand is predicted to rise to 200,000 tonnes per year in 2014.

With China setting up policies to restrict the exports of rare earths to benefit from the comparative advantage that they provide for its domestic industries; importers, such as Japan are worried that the supply available will not be sufficient to meet their needs. The U.S. Geological Survey has however iterated that the long-term outlook for rare earth elements “appears to be for an increasingly competitive and diverse group of rare-earth suppliers”. If all the rare earths projects currently envisioned were coming on steam shortage scenarios could be avoided.

As a result of expected demand many new source of supplies are being considered (I plan on briefing you on new plays in an upcoming entry). In addition, countries such as the United States, Japan, Australia and South Africa that used to have a production capacity until operations became uneconomic as a result of competition from China could be resuming their operations.





Iron Ore: It’s in season

19 11 2009

Should you care to know, I was thrilled upon hearing that Vale wants to start iron ore contracts (2010/2011) negotiations this month. Thrilled because the last negotiations ended up being a succession of drama and political games. Who needs tv series when iron ore contract negotiations can do just as well?

There are a number of developments that have persisted or unfolded since the previous round of negotiations. Mr. Hu is still detained. Rio Tinto and BHP Billiton are struggling to make their Pilbara iron ore tie up bearable to regulatory authorities in Europe and elsewhere. In a bid to calm authorities on their monopolistic tendencies, they have decide not to market jointly 15 per cent of their Pilbara production. On its side of the Pilbara, Fortescue, which has started Q4 negotiations with China roughly a month ago (and with Japan and Korea this week), has unveiled the Solomon project which plans on for a new mine, new rail and new port to produce roughly 60 mtpa to 100 mtpa of iron ore. Western Australia ventures are also at risk of facing higher royalties.

At present time, I guess it makes sense for iron ore producers to secure prices at a time where recovery is gathering speed amid the persistent risks of a double-dip recession materializing. The tone of the negotiations may be different this time around. BHP Billiton highlighted this autumn that China realised that it had to play with the big boys. Whether this means that China will stop pleading in favour of a Chinese mechanism in iron ore contracts is unclear. The recent rise in spot prices is also a contributing factor to weakening the Chinese position in negotiations, it has been reported.