Demand Bouncing Back

By Kishori Krishnan Exclusive To Iron Investing News

Global commodity demand appears to be bouncing back. Miners, who had been savagely affected by the recession as customers slammed the brakes on spending and relied on the backlogs in their warehouses, are also reporting a pick-up. Steadily rising prices for key commodities such as copper and iron ore also confirm the assessment that China’s restocking of its inventories is “essentially complete”, which will help to stabilize a vast chunk of global demand.

BHP Billiton‘s quarterly production report, however, showed that the market is still being pushed in both directions at once, as countries struggle to adjust inventories of raw materials to the uncertain economic conditions.

BHP reported rising demand from the developed economies of Europe, the US and Japan, adding: “We are now seeing evidence that restocking has commenced.”

The trend is an index of growing economic confidence, as pared-down stocks are refilled in expectation of increasing activity in the near future.

BHP, the Anglo-Australian company’s involvement in the full range of mining, from iron ore to diamonds to coal, gives it a broad take on the overall state of the commodities market. Last November, BHP Billiton was forced to defer delivery of 6 million tonnes of iron ore – equivalent to 5 per cent of its annual production – after a stockpile of up to 68 million tonnes built up at Chinese ports, with another 125 million tonnes standing idle at the country’s steel mills.

Following last year’s hostile but ultimately abortive attempted takeover ofRio Tinto by BHP Billiton, a different kind of deal is on the table. BHP walked away in November, blaming its decision on Rio’s $40 billion (£24 billion) debt mountain, which was accrued as a result of its top-of-the-market purchase of the US aluminium group Alcan.

BHP’s withdrawal sent Rio into the arms of Chinalco, the state-owned Chinese company, but shareholder opposition and the improving economic outlook killed off the deal. Instead, Rio conducted a $15.2 billion rights issue and formed a joint venture with BHP sharing the two companies’ Pilbara assets return for a $5.8 billion lump sum.

Business recovery

There are clear signs though of a recovery. In March, Wuhan Iron and Steel cut production by at least 15 per cent as the economic slowdown crimped demand, Deng of Wuhan Iron and Steel said. Wuhan Iron and Steel, Baosteel Group Corp and Anshan Iron and Steel Group have idled four furnaces.

However, thanks to government stimulus packages for the steel and auto industries, Wuhan Iron and Steel saw both sales and profits swelling rapidly. The company is a major domestic supplier of automotive steel products. Wuhan Iron and Steel is targeting sales of at least 120 billion yuan (US$ 17.57 billion) for the year.

Stocks soar

Steelmakers in Shanghai soared on Tuesday, on rumors that a government plan on industry restructuring might be rolled out in September. Baoshan Iron & Steel Ltd, China’s biggest steel producer, jumped 8.7 per cent to 9.40 yuan, while Anshang Steel Co advanced by the daily 10 per cent limit to 17.11 yuan.

Chinese shares rose for a fifth session Tuesday amid a surge in liquidity despite the banking regulator’s reminder to lenders not to finance speculation. The Shanghai benchmark is up 89 per cent this year on a surge in bank lending to support China’s stimulus programme.

“The worries were also digested in late afternoon trading because investors are still seeking more reasons to buy amid strong market sentiment,” said Huang Xiangbin, an analyst for Cinda Securities in Beijing.

Similarly, Asian stocks rose for a 10th day, driving the MSCI Asia Pacific Index to its longest winning streak since 2004, on confidence a rebound in regional economies would boost earnings.

A gauge of six metals in London climbed for a 10th day on July 24 to a level not seen since October 9. Crude oil rose 1.3 per cent to $68.05 a barrel in New York the same day, the highest settlement since July 1. However, oil dipped 0.4 per cent on Tuesday.

Cash prices for iron ore delivered to China rose last week, according to the Metal Bulletin. That placed spot ore 25 per cent above the agreed benchmark contract price, according to analysts at Macquarie Group Ltd.

China & Aussie cozy up

Last year, Chinese companies had offered at least $18 billion to buy mining assets around the world to secure supplies of raw materials.

Sinosteel Corp, China’s second-largest iron ore trader, won control of Australian ore producer Midwest Corp last year with a A$1.36 billion offer.

On Tuesday, Wuhan Iron and Steel (Group) Corp, the country’s third-largest steel maker, signed an agreement with Australian Centrex Metals Ltd (CXM) last week to jointly develop iron ore mines in southern Australia.

The Chinese company signed a memorandum valid until December 2010 to conduct a study into building “steel plants and rolling mills,” according to a statement from Western Australian Premier Colin Barnett. It’s also “shown interest in iron ore processing” at Mt. Karara.

Anshan Steel is planning an iron ore project at Mt. Karara with Gindalbie Metals Ltd to secure supplies of the steelmaking ingredient to feed expanding capacity. Iron ore producers in Australia have sold shares and brought in Chinese investors as they sought funding amid the global credit crunch.

Under the agreement, which has yet to be approved by the two countries’ governments, CXM’s listed company will issue 15 per cent more shares to Wuhan Iron and Steel, making the Chinese company the second-largest shareholder of the Australian company.

Wuhan Iron and Steel will pay A$216 million (US$ 172 million) to gain 60 per cent of the interests of the jointly operated mine area. The iron ore mine covers about 600 sq km in southern Australia.

At the end of last year, Wuhan Iron and Steel paid Centrex Metals Ltd as much as A$180 million (US$ 127 million) for a share in iron ore projects in Australia to secure supplies of the raw material.

Canadian mine

Meanwhile, Wuhan Iron and Steel has finalised the terms of a $240-million investment agreement with Consolidated Thompson Iron Mines of Canada.

According to the agreement, Wuhan Iron and Steel will buy 38.7 million common shares of the Canadian company at a price of C$2.72 per share, which represents a 19.99 per cent stake in the company. Consolidated Thompson will receive aggregate proceeds of C$105.2 million.

The two companies will also establish a limited partnership in which Wuhan Iron and Steel will hold a 25 per cent interest, and to which Consolidated Thompson will contribute its Bloom Lake property. Located in Duplessis County in Quebec, Bloom Lake is a development-stage iron ore project with a 34-year mining life.

The move is expected to help the Chinese company secure its overseas iron ore supply at a time when the country’s steel industry is largely depending on the world’s top three iron ore miners: BHP, Rio Tinto and Vale.