Fluctuating Fortunes

- September 8th, 2009

By Kishori Krishnan Exclusive To Iron Investing News
Iron ore negotiations are a real conundrum, as next year’s talks are soon to begin, yet this year’s have not been resolved. In the meantime, the trio – Rio Tinto, Brazil’s Vale and BHP have been taking advantage of spot prices in iron, which have been on the […]

By Kishori Krishnan Exclusive To Iron Investing News
Iron Ore prices swing

Iron ore negotiations are a real conundrum, as next year’s talks are soon to begin, yet this year’s have not been resolved. In the meantime, the trio – Rio Tinto, Brazil’s Vale and BHP have been taking advantage of spot prices in iron, which have been on the way down because of China’s growing steel glut, though still well above last year’s record contract prices that caused the global steel sector to choke in its own molten metal.

There is bound to be no real base prices. There has also been an admission by the Chinese by way of the six-month price deal struck with Fortescue last month that yearly single price contracts are dead. The China Iron and Steel Association has also gone and made a spectacular contribution to the mess China finds itself in, after it seized control of the negotiations from the biggest steelmaker Baosteel.

This annoyed Baosteel and the other top 70 state-owned mills CISA represents. It also put a bunch of bureaucrats in charge of a commercial process – something even the Chinese usually try to avoid.
It then compounded all of this by rejecting the price cut of 33 per cent of the best “fine” iron ore and pushing for 40 per cent or more, while spot price continued to soar.

But for all the drama, iron ore prices are simply the noise and fury that cloud the real issue – China’s intractable problem with its steel sector. China wants to consolidate and shut down many hundreds of small backyard mills that over-pollute. But such mills can often produce basic steel products – the countless rods and sheets used to build the infrastructure being funding by the 4 trillion Yuan-plus (US$ 686 billion) government stimulus package – better than the more technologically advanced products.

What has added to the muddle is that Australian iron ore prospector United Minerals Corp (UMC.AX) has agreed a supply and equity deal with China Railway Materials Commercial Corp, it said on Tuesday. Under the deal, United would supply 3 million tonnes of ore a year for 10 years, with China Railway Materials taking A$27 million ($23 million) in United shares. United said the deal would allow its iron ore deposit in Australia’s Pilbara region to move towards production.

Baby steps

Chinese state-owned firms have expanded their footprint in Australia’s mining industry agreeing to help fund two iron ore explorers in return for supply contracts and taking a controlling stake in a uranium prospector.

China, the world’s third-largest economy, is leading the world out of the deepest global recession in 80 years, and its appetite for raw materials is as strong as ever, especially for Australian commodities such as iron ore.

In two iron ore-related deals announced on Tuesday, China Railway Materials Commercial Corp forged separate alliances with explorers FerrAus (FRS.AX) and United Minerals (UMC.AX), both operating in west Australia’s vast Pilbara iron ore belt.

Another junior iron ore miner, Atlas Iron (AGO.AX), revealed to Reuters that it, too, had held inconclusive talks with prospective Chinese investors, though managing director David Flanagan said Atlas did not need fresh equity right now.

All foreign sovereign investments need Australian government approval, and the queue of Chinese state investments awaiting the government’s go-ahead is lengthening by the day. In the next few weeks, the Australian government’s secretive Foreign Investment Review Board is expected to rule on a Chinese state-owned firm’s $400 million deal to take a majority stake in rare-earths company Lynas Corp (LYC.AX).

FerrAus (Atlas’s immediate neighbour) has also just announced a tie-up with China Railway Materials by which the state-owned enterprise takes a $12.6 million FerrAust stake of 12 per cent. Atlas, which already owns 22.2 per cent of Warwick, is offering one of its own shares for every three Wokkas in an agreed deal. The combined entity expects to emerge with a resource of 154 million tonnes of direct-shipping ore, plus “exploration targets” of 165-338mt. Atlas already boasts a DSO resource of 127mt.

Atlas has been producing from its Pardoo project since December, targeting 1mt this year. Atlas expects this to grow to 12mt by 2012, with additional tonnage from its Wodgina and Abydos projects. But through the merger, Atlas targets an additional 14mt, taking total export tonnage to a handy 26mt by the end of 2014.

Analysts maintain that Warwick’s 26mt inferred resource is not enough to develop in its own right, so it makes sense for Warwick to get in bed with a bigger partner to drive a better deal on railway access (probably with Fortescue) and pricing. Holders of Warwick enjoy a 20 per cent premium and because it’s scrip they get to keep their skin in the game.

Rio Tinto

Mining giant Rio Tinto Ltd has exported its three billionth tonne of iron ore from Australia, the company says. In a statement on Tuesday Rio Tinto, the world’s second-biggest iron ore producer, said the statistic showed the exponential growth of the Pilbara region of Western Australia.

“We took 25 years to ship our first billion tonnes, 12 years to reach our second billion tonnes and now just six years to post our third billionth tonne,” a company statement said. It said the milestone was reached about mid-morning local time on Tuesday in WA.

Rio Tinto’s first shipment of iron ore from Australia was sent on August 22, 1966, to Japan.

China has since eclipsed Japan to become the largest market for iron ore, accounting for over half of Rio Tinto’s exports.

Change of office

Montreal is gaining the head office of Consolidated Thompson Iron Mines Ltd, developer of the $500 million Bloom Lake iron ore project in Quebec-Labrador and headed by former Newfoundland and Labrador Premier Brian Tobin as executive chairman.The HQ moves from Toronto.

The company plans to get the Bloom Lake mine in operation by year-end, following the signing of a $200 million U.S. financing pact with China’s Wuhan Iron & Steel Corp., which is committed to take about half the output.

“Wuhan has become our strategic partner and we have secured all the necessary funding to production,” said CEO Richard Quesnel. “We’re transitioning from an exploration company to a world-class iron ore producer.”

Iron prices

Meanwhile, spot Iron ore prices have demonstrated uncanny gyration over the last 7 months sharpening the correlation with the swinging fortunes in the Chinese steel market. The magnitude of the fluctuation can be ascertained from an acute upswing of 64 per cent during April 2009 to August 2009 beginning, followed by steep decline of 24 per cent in the preceding 3 weeks during August 14 2009 to September 5 2009, is having a striking correlation with the price movements in the Chinese steel market, which witnessed the drop of 17 per cent during August 7 2009 to September 5 2009, the biggest since October 2008 after a continuous rally of 17 weeks.

The prime mover behind this fluctuating fortune has been demand fuelled by stimulus package unable to sustain the backlash of disproportionate production leading to unmitigated inventory and unsustainable end user demand. The complexity was compounded by an undercurrent of speculation and profiteering by cash starved mills and traders.

Fissures started appearing in August as construction activity waned during the monsoon and the market was unable to absorb the maddening production touching 52 million tonnes in August 2009.

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