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Concerns about the future of the iron market are growing. Investors considering their next move may want to consider oversupply, China’s electricity and Japan’s steel industry.
By Michelle Smith – Exclusive to Iron Investing News
Oversupply and emerging producers
Profit is attractive and that could be part of iron ore’s demise. Xu Lejiang, CEO of Baosteel, China’s second biggest steelmaker, warns that the bubble will burst. “Everyone who has money rushing to invest in iron ore,” said Lejiang in a recent Bloomberg interview.
The world’s three major iron producers, Vale (NYSE:VALE), Rio Tinto (NYSE:RIO)(LSE:RIO) and BHP Billiton (NYSE:BHP), who have plans to invest $45 billion in their mines. However, this vast increase in supply is set to arrive at a time when predictions about China’s growth have been downsized and steel production may be set to decline.
Significance to investors:
“Iron ore prices will definitely fall at some point because the supply-demand situation will have a turnaround,” Lejiang said.
Noting that “a lot of investors only dig iron ore on the stock market and they will never see physical output from their mines” Lejiang warns that the biggest losers are likely to be speculative companies that haven’t started production and their investors. This prediction is supported by a 30-50 percent drop in 52-week share prices for explorers and developers versus a 10 percent drop for producers.
Chinese electricity shortages
This summer China, the world’s largest steel exporter, may face its worst power shortage since 2004. At a time when electricity consumption peaks, suppliers will provide their consumers with less energy… intentionally.
The government controls electricity prices, but it appears to be ignoring the increasing costs of coal to produce it. A New York Times article, quotes utility giant China Power International’s chairwoman warning that one-fifth of China’s coal-fired power plants could face bankruptcy without rate hikes. The plants are responding by operating for fewer hours and scheduling disruptive projects during the summer.
Significance to investors:
When power shortages hit last year, some small steel producers were forced to cut production or to close. Summer isn’t here yet, but in some parts of China, production is already being affected and small mills are expected to bear the brunt again. Problems have not reached the north, where steel giants operate, but mills are starting to shun stockpiles and are beginning to operate “hand to mouth,” leading to speculations of decreased iron demand. The New York Times reports that China’s electricity shortage has already contributed to a 10 percent decline in commodity prices, such as iron.
Japanese steel production
Japan’s natural disaster did not shake the life out of the nation’s steel industry. Production in April was down for the second month, but was nowhere near the 2 million ton drop some analysts expected. Following the events in March, it was thought that Japanese steelmakers would be absent from the market for a while. As a result, there were predictions that iron prices, which had been upward bound, would be eased due to supplies left unpurchased by the Japanese, a major buyer.
Significance to investors:
Despite uncertainty in the Asian steel market, a current oversupply of steel, and obstacles such as electricity shortages caused by the natural disaster, Japan’s steelmakers are resisting major production cuts. Iron prices were expected to dive due to Japan’s hiatus and to rebound only when the nation was fully back in the game. But the World Steel Association says that the Japanese steel industry is on the road to full recovery now.