[Flash News] Iron Ore

9 04 2010

The last weeks have been quite eventful on the iron ore front. I am quite sceptical of my capacity to aggregate all of the important breakthroughs in a single entry so instead I will just lead you to where the good reads are.

Regulatory affairs

In response to the announce of Vale and BHP Billiton’s pricing agreement with Japanese steel mills, steel makers have called for greater scrutiny from competition agencies around the world. Excessive pricing of the big three iron ore producers is of issue. Worldsteel has pressed for such an investigation to take place imminently and has been supported by Eurofer and the European Automobile Manufacturers’ Association. Mineweb

Eurofer’s request for investigation to the European competition authorities met with scepticism by Vale who requested that Eurofer members be investigated for coordinating their approaches in negotiating with the Brazilian firm. Morning Star

On other competition matters, Australia’s Competition and Consumer Commission is further postponing the review of Rio Tinto and BHP Billiton’s Pilbara joint venture. Concerns about the ability of the firms to control supply and to coordinate supply with Vale persist. Reuters

Pricing & Benchmarks

Vale signs 90 per cent increase with Japanese steel makers. Business Insider
Quarterly Pricing, it’s on! 90% of iron ore sold by Vale through contracts is now following quarterly price adjustments. Business Week.

There might however still be value in longer term contracts. “Don’t write them off yet”. Financial Times.

China would like to keep the annual benchmark system intact and include smaller mills, currently purchasing iron ore at spot prices, under such a system. Mining Weekly

Increasing input costs will be passed onto consumers and “may push steel rates up by 21%” according to Lakshmi Mittal. Business Week

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Flash News! Update on U.S Coal, Mongolia & [lots of other things]

16 02 2010

I’ve been falling behind schedule but still let me update on recent posts in order to all keep you freshly informed.

Iron Ore. The survival of the benchmark system (i.e. annual price setting process) has been questioned since last year as painful negotiations has led the Chinese to purchase iron ore on spot markets. BHP Billiton has been pushing in favour of an overhaul of the benchmark system to better reflect spot prices and its chief executive Marius Klopper previously stated that the miner would not sign any new volumes to contracts set through annually produced pricing. BHP’s quest is gathering speed as Brazilian giant Vale also concurred saying it, too, was open to spot-market trading especially as spot prices are twice the current benchmark prices. In the interim, BHP has approached Japanese steel mills with the possibility to shift to quarterly pricing.

In the last steel update, I have reported on market research foreseeing a 40% increase in iron ore prices. It seem a 40% rise would only be a provisional arrangement and an annual price agreement, if any, would be closer to a 80% for the 2010-2011 delivery period.

Coal in the U.S. In the entry on the U.S. Budget proposal, I have warned of the backlash that the decision to repeal corporate income tax exemptions for the coal, oil and gas industries would unleash. Shortly after the publication of the Budget, Senator Jay Rockefeller of West Virginia complained about the inconsistency of such message regarding the future of coal and warned that this announcement could lead producers to reduce their output. He based his critique on the absence of wording related to other measures already established in support of coal production and recent US EPA action regarding mountain-top removal.

Mongolia. Last week the country cancelled the Tavan Tolgoi auction and decided to retain 100% of the deposit. As mentioned in a post in October, Tavan Tolgoi is the world’s largest undeveloped coal deposits. Intense pressures from China and Russia to acquire stakes in the deposits have influenced Mongolia’s decision. It has been reported that the company could be considering hiring a contract mining company to develop the deposit. The Tavan Tolgoi project has historically been considered too big for a single company to develop and mine. Still the Financial Times suggested Australian contract miner Leighton may be hired to develop Tavan Tolgoi while retaining full state ownership of the huge coalfield.

OSISKO has recently provided an update reserve and resource estimate for its Malartic project. This new estimate is based on the combined, previously-reported resources of the Canadian Malartic and South Barnat deposits. The resource estimated at 6.28 million onces in proven and probable reserves when I first wrote about Osisko has been increased to 8.97 million ounces which has for effect of increasing the mine life by 25%. The press release is available 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.





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.





China and iron ore this week

5 09 2009

Well it seems that the authority that CNN is does not agree with my reading of the China/Fortescue deal. Some really see the potential in Fortescue being a disruptive force in the iron ore triad’s “freeride”. That is based on the assumption that the company could possibly reach an output of 200 million tons a year. At present the capacity of Fortescue is estimated at 45 million tons a year. You can do the math; Fortescue is far from reaching the 200 million tons threshold which leads me to question the timeframe under which such a grand master plan can be implemented.

Fortescue current supply agreement of 20 million tonnes will cover only 5% of China’s expected iron ore demand for 2009 which confirm my initial view that the deal between Fortescue and China is overpriced.

On other iron ore news, Baosteel admitted earlier this week that it was paying provisional benchmark prices to Vale and Rio Tinto. The prices match what was offered to Japanese and South Korean steel mills. Baosteel also took a stake in Aquila Resources, an Australian iron ore explorer, last week.





Iron ore politics

23 08 2009

You know sometimes governments are so keen on pursuing a specific agenda that no matter how much opposition and obstacles they may face they will push their policies through eventually calling the outcomes a victory, a win-win solution even though they lead to little or no benefits besides face-saving. China’s iron ore quest fits that pattern quite well.

Here’s the grand debacle in a nutshell. Earlier this year China started to negotiate contracts for iron ore seeking to achieve a 40-45% reduction from the previous year’s contracts. As the price of iron ore picked up, the top iron ore suppliers were reluctant to agree to such a cut considering that Japanese mills had set up contracts reducing benchmark prices by 33% from the previous year. As contracts expired, Chinese steel mills had to purchase iron ore at spot prices for more than they would have paid had they settled for a 33% reduction. Some mills even defected the national contract negotiation scheme to secure their own individual contracts. One would think the four Rio Tinto officials jailed on accusations of bribery related to the iron ore negotiations would crown the whole Chinese endeavour as a fiasco. It truly did but I suggest that it is the deal reached this week with Australian miner Fortescue Metal that allows the scenario explained in the first paragraph to materialize.

Fortescue Metal is an up and comer in the field of iron ore. It started mining at its Pilbara project in 2008 and is contemplating expansion activities to compete with bigger Pilbara neighbours Rio Tinto and BHP Billiton. As such, the deal reached between Baosteel and China Iron and Steel Association (CISA) and Fortescue, involves a 35% price cut from the previous year contract prices in exchange of US $6 billion in funding whose terms have yet to be detailed. This deal applies to about 20 million tonnes of iron ore and will allow China to save $35 million according to a Reuters’ calculation which makes it an expensive deal but allows for CISA to save face with a deal that is slightly better than what is offered to mills in South Korea and Japan. MasterCard’s slogan :”There are some things money can’t buy ..” seems to have lost its meaning all of a sudden. Of course China could be attempting to breed a rival to the top iron ore suppliers but the extent to which those may be influenced by this deal is still unclear. According to Macquarie this deal will prevent Fortescue from taking advantage of higher spot prices. Also as a result of this deal, Fortescue will be loaded with debt issued by its only trading partner may become problematic in the longer term.

In sum, this deal is far from being as rosy as China and Fortescue would like to hail it. The deal also comes across as second best to the failed Rio Tinto- Chinalco deal in which Chinalco would have secured stakes in Rio Tinto iron ore assets.