Iron Ore

Home sales surged in May and major producer Australia cut its iron ore forecast further.

US Home Sales Hit 9-Year High

Contracts to buy existing homes in the US rose in May to their highest level in over nine years, boosting the housing market and the broader economic outlook.

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The National Association of Realtors said on Monday that its pending home sales index, based on contracts signed last month, increased 0.9% to 112.6, the highest level since April 2006. Contracts have now increased for five straight months.

Australia Cuts Iron Ore Price Forecast

Australia, on Tuesday, cut its price forecast for iron ore in 2015 by 10% to $54.40 a metric ton, citing a weak outlook for the commodity’s main market, China’s steel sector. The forecast by the Department of Industry and Science is a sharp decrease from the $60.40 per mt predicted three months ago and is way off the $94 a mt touted in January.

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PriceWaterhouseCoopers‘ Mine 2015 Report was good news for India, but cast a troubling picture of the overall global mining industry.

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Dry-fuel miner Coal India Ltd. (CIL) moved up from the 8th to the 6th slot on the list of the largest mining companies in the world in terms of market capital.

A second state-owned company, which was also the country’s top iron ore miner, National Mineral Development Corporation (NMDC), also improved its ranking by coming in 21st, up three spots over the previous year.

What is Mine 2015?

Mine 2015 analyzed the financial performance of the world’s top 40 mining companies by market capitalization. The report said market values continue to fall, overall, in spite of improvements reported in the financial results of all top 40 companies.

Depending on which way you read it, in 2014, a collective $156 billion was eroded (about 16%) of the top 40 companies’ combined market value, but then again, that was only half of the 2013 slide. The collective market capitalization came in at $791 billion in 2014, which was the range miners held a decade ago.

The report said the world’s largest miners had reduced spending but stepped up production. The industry was also helped by lower input costs and currency devaluation. PwC did note, however, that weak commodity prices due to low demand hammered down revenues.

The Iron Ore Drag

The report said the downturn was largely driven by iron ore miners, particularly diversified companies with large exposure to shifts in commodity prices.

Last year, iron ore was the hardest hit, with prices dropping by half because of a supply glut and a negative short-term demand outlook, the report said.

On the coal front, coal miners in the BRICS countries (Brazil, Russia, India, China, South Africa) saw their values increase 19% over the period, regaining almost half of the value they lost in 2013.

In Asia, more industry consolidation was expected between key resource players from India and China in order to stem production overcapacity, the report said.

Chinese Production Still Surging

The coal companies of China made significant gains in the ranking of the top 40 mining companies, with three appearing in the this year’s top twenty.

China Shenhua Energy Co. Ltd (Shenhua) topped the list, becoming the third most valuable mining company (based on market capitalization) after BHP Billiton and Rio Tinto Group. Shenhua moved up from fifth in 2013’s rankings.

Another company, China Coal Energy Co. climbed to 14th rank from 23rd in 2013, with a 30% increase in valuation, while Inner Mongolia Yitai Coal Co. jumped to 18th from 25th. Yanzhou Coal Mining Co. came in at 26th – up from 34th in 2013. Yanzhou also recorded a more than 30% increase in value over 2014.

US Miners Can’t Keep Pace

On the other hand, not many US coal-mining companies charted in Mine 2015. Consol Energy found itself at number 28. No other companies charted despite noted concern from US manufacturing execs about local resource supply.

Of the 40 companies, 15 miners saw their share values appreciate, while 25 witnessed a decline.

The average return on capital employed was largely below the minimum hurdle investment rate of 15 to 20% set by the companies themselves. Only 6 of the 40 passed the 15% benchmark: CIL (coal), OAO Norilsk Nickel (nickel), NMDC (iron ore), Randgold (gold), Shandong Gold (gold), and Newcrest (gold), according to the report.

Copper Still Stagnating

On the copper front, Mine 2015 noted that global copper production had gone up by only 2.8% last year, which was way below the 8.1% of 2013. PwC noted that the world’s largest copper producer, Chile, had faced problems increasing its production due to falling grades.

PwC’s general outlook for the global metals and mining market though remains dreary due to the continuance of a slower rate of economic growth, particularly in emerging markets, especially due to the cooling off of China’s growth rate.

In 2014, iron ore, coal and copper prices had fallen by 50%, 26% and 11%, respectively, according to the report.

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Crude steel output will shrink as much as 2% this year, according to Bloomberg reporting data from the China Iron & Steel Association.

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That’s lower than the group’s March estimate of a 1.1% decline and would be the first contraction since at least 1990 the paper says. Crude steel output will shrink to 807 million metric tons this year from 823 mmt in 2014, according to the steel association as producers shut capacity.

Source Bloomberg

Source: Bloomberg

The reduction is being driven by a number of factors but profitability, or the lack of it, seems to be the greatest. Iron ore prices have risen by 40% in just two months as low port stocks at China’s ports suggested a tighter supply market Reuters reports. The market is speculating that producers and traders are holding back supplies in an effort to push up prices but top producer Rio Tinto Group pours cold water on that theory saying they are not in the business of playing the market month by month and supply is plentiful.

Supply Up, Demand Down

The firm will likely ship 350 mmt this year, up from 300 mmt last year. Lower seaborne iron ore prices in Q1 appear to have finally taken their toll on domestic iron ore producers, though, with production dropping 11% in the first five months of 2015 as higher cost producers have been squeezed out.

Source: Bloomberg

Source: Bloomberg

Few are expecting iron ore prices to remain elevated with steel production falling and supply plentiful, iron ore prices are likely to come down from here. Steel reinforcement bar (rebar), has fallen 14% the current quarter to 2,265 CNY per mt ($365/ton) as of Friday, the lowest since at least 2003, according to data from Beijing Antaike quoted by Bloomberg.

Construction Falling

The construction sector has been hit particularly hard, as evidenced by the amount of land purchased for real estate development falling 31% in the first five months of this year and new construction starts slumping 16%, according to the National Bureau of Statistics.

The paper quotes Goldman Sachs saying about 35% of China’s steel demand is related to housing and construction-related activity. Led by construction, China’s apparent steel demand fell 4% to 302 mmt during the first five months of 2015, a reversal from 3% growth in 2014. Meanwhile, exports have surged further underlying the excess domestic inventory position.

China exported a record 10.3 mmt in January and shipments in the first five months of the year were 28% higher than the same period in 2014. At that rate, the country ships out more than any other single country produces, according to data from the World Steel Association; an untenable situation in the long run prompting widespread anti-dumping actions in Europe and the Americas.

No Quick Chinese Turnaround

To what extent profitability will play a role on China’s steel production in H2 remains to be seen. Most expect iron ore prices to fall, reducing supply-side cost pressures for steel producers even if it does little for demand. Reuters quotes Julius Baer estimates of $40 per mt as a possible low point for iron ore and Citi seems to agree saying, “We expect iron ore prices to reverse sharply and decline over the coming months,” averaging $51/mt this year and $40/mt in 2016.

While a few boosters are looking to infrastructure, such as Russian-Chinese pipeline projects and electrification as future drivers of increased steel demand, most are not seeing any increase in demand anytime soon.

Indeed, Li Xinchuang, CISA’s deputy secretary-general, is quoted by Bloomberg as saying in an interview this week: “Low prices will be with us for a long time. So will tepid demand and zero growth, or even contraction, in output.”

That doesn’t bode well for the rest of the world seeing high levels of Chinese steel exports, even when anti-dumping cases are successful in blocking direct Chinese steel exports to a particular market, there is still the effect of diverting that supply to other markets and driving down global steel prices as a result.

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The iron ore price recovery looks like it’ll be short-lived and half of the board of an Australian uranium miner quit after their partner company refused to expand.

Chinese Steel Slump

A slump in Chinese demand for steel has poured cold water on a rally in iron ore, with prices for the raw material likely to drop over the rest of the year, traders and analysts said.

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Dwindling stocks at China’s ports suggested tighter supply in a market that had been hit hard by plentiful or, but Goldman Sachs is predicting prices will fall back below $50 a metric ton as lack of demand persists in China.

Half of ERA Board Quits

Half of the board members of Energy Resources of Australia (ERA), the operator of Northern Australia’s Ranger uranium mine, have announced their resignations amid uncertainty over the mine’s future.

Three members remain on the board after ERA chairman Peter McMahon and independent non-executive directors Helen Garnett and David Smith stepped down over the weekend. The board members said majority owner Rio Tinto Group‘s decision to abandon work on the mine’s expansion. They said the cancellation made it difficult for the company to pursue its goals. ERA’s stock has plunged more than 70% since it said, June 12, that it would not proceed with the final development study for the Ranger 3 Deeps uranium project due to low prices.

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According to a report, crude-steel output in China dropped 1.3% to 270.07 million metric tons in the first four months of 2015 as compared to the same period in 2014. The World Steel Association has forecast that China will end up using far less steel this year and maybe even the next. Which again means more supply and far less demand.

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The report quoted Alan Chirgwin, BHP Billiton iron ore marketing vice president, as saying steel supply was expected to rise by about 110 million metric tons this year, exceeding demand growth by around 40 mmt.

Yet this has not fazed Rio Tinto Group, for example, which recently announced it would continue with its plan to produce iron ore at full capacity despite the fall in prices. While BHP and Brazil’s Vale SA have, for now, stepped on the brakes vis-à-vis their medium-term plans, team Rio, on the other hand, thinks reducing production costs will help it hang on to its lead…and profits.

Betting on a Comeback

Rio Tinto sees China coming back with renewed vigor and driving global iron ore demand through 2030.

Where does that leave India? So far as iron ore or even steel consumption is concerned, China is miles ahead of India, even in the fatigued condition it finds itself today. India, as reported by MetalMiner, drew a blank for about two years due to a court-imposed ban on ore mining, which left its steel companies at the mercy of imports, something that they continue to rely on even today.

That had also affected its iron ore exports, especially from the ore-rich provinces of Goa and Odisha. India’s iron ore imports went up dramatically to a record 6.76 million tons in the first 7 months of the 2014-15 fiscal year. Once, the country was the third-largest supplier of iron ore to the world, but, because of the export duty and a national mining ban, it had turned into an importer.

Analysts predict India was likely to remain a net importer of iron ore in 2015-16 as well, no thanks to the continued drop in falling international rates. The only silver lining, claimed analysts, could be that due to the resumption in the domestic production of iron ore, the quantity of imports may not be as high as the last fiscal year.

Captive Market

India’s steel companies do not have captive mines, so they have to get their average 95 mmt a year of iron ore from elsewhere. With international price of ore hovering today at about $50 per mt for high-grade ore, it is too attractive a deal for Indian steel mills to be passed on. As reference points, last year, iron ore imports happened when rates had touched $90 per mt.

In all this, Australia, a country that sells about 80% of its ore to China, sits in a happy position. While it hopes that the recent cuts in interest rates will revive the Chinese economy, and thus its demand for iron ore and coking coke, it is also looking increasingly to India to pick up its stock. Last year, for example, as reported by MetalMiner Australia had approved Adani Group’s approximate $15.5-billion (AUS $16.5 billion) Carmichael coal project in Queensland that could yield up to 60 million mt of coal per year. That was just the beginning. For the Aussies, if the dragon’s appetite for iron ore and coking coal is satiated, the hungry tiger is always lurking in the background.

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When the Tiger and the Dragon dine together the world sits up and takes note.

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Signing business agreements worth $22 billion is a big deal so Indian Prime Minister Narendra Modi’s recent visit to China made big, bold headlines here. Some of India’s old, and some not so old (Adani, Bhusan Power and Steel), players in the steel and power sectors, were signatories to the 26 deals.

Steel and Energy Deals

The notable contracts included the one between India’s IL&FS Energy Development Co. and China Huaneng Group for a 4,000-megawatt thermal power project, and India’s Bhushan Power and Steel sealing a pact with China National Technical Import and Export Corporation for an integrated steel project in Indian province of Gujarat.

So here were two Asian, nee global, giants, breaking bread and talking business at the same table, sending analysts scurrying to their laptops to chalk out spreadsheets and draw pie charts in an effort to understand the impact of all this in the long term.

While business leaders of both nations, including Alibaba Group Chairman Jack Ma, spoke of long-term interests, such talk brought the arclight swinging back to the present and short-term situation currently prevailing in the Asian region, especially in iron ore and coking coke, two crucial ingredients in making steel.

There’s no doubt in anyone’s mind that steel is the mainstay of Asia’s infrastructure, a fact that has had iron ore and coal miners — and even steel majors in China, India and as so far as Australia — jockeying for a major piece of new market share. With demand from Europe and the US lacking, suppliers in all three countries are walking a thinly veiled tight rope to ensure their survival.

Wither Demand

Once a destination of hope, the Chinese dragon, for now, has lost some of its hunger. Some say next-door neighbor India is where one can find fresh action. The jury’s honestly still out on that one, though. But the slowdown in China’s economy means less need for steel, in turn, lowering the demand for ore and coking coal. Leaving miners re-tweaking their business plans.

Last year, for example, the Rio Tinto Group, BHP Billiton Ltd. in Australia, and Vale SA of Brazil, to stem the tide, had stepped up low-cost output to pump up volumes, leading to a glut. Now, everybody’s mantra seems to be – cut production costs faster than the falling prices.

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Non-residential construction starts, a good leading indicator for outlays and spending, spiked more than 40% in February according to a major bank report due, in part, to a large jump in warehouse spending and a major iron ore producer is cutting production as prices just start to recover.

Warehouse Spending Jumps

A recent economic report from Wells Fargo Securities Economics Group showed private warehouse spending for last year jumped 48.6% and is expected to rise again in 2015.

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E-commerce was cited as just one reason for the accelerated growth in warehouse spending.

Companies such as Amazon are changing almost every aspect of the supply chain as it expands its reach to a growing share of the population by placing fulfillment centers close to the consumer, the report says, noting that Amazon has about 75 fulfillment centers in the US and another 15 underway.

Wells Fargo estimates that there will be growth in institutional and commercial building; those markets have been slower than others, like manufacturing building, in 2014. The bank also predicts structure investment spending to increase 5% this year and 8% in 2016.

Iron Ore Production Slashed

BHP Billiton, the world’s largest mining company, said on Tuesday it would slash its iron ore production cost further and cut spending to better withstand a downturn in commodity prices.

Giant iron ore producer BHP and rival Rio Tinto Group are locked in a battle to become the lowest cost iron producer.

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Iron ore has now gained more than 29% since early April when it was trading as low as $47.08 a metric ton.

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The dramatic turnaround has been fueled in recent weeks by BHP Billiton‘s decision to slow its rate of production growth. The market has taken this as the start of greater market discipline by producers. A rebound in iron ore shipments following the end of the Chinese New Year has added to a sense that the worst is over and the bounce back has begun.

Over the past month, three of the world’s four largest seaborne iron ore producers have suggested they will make adjustments to production volumes, Rio Tinto Group being the only dissenter but Chairman Jan Du Plessis told shareholders at an annual general meeting in Perth that our share of the seaborne trade today is 20% and a decade ago it was 20%., suggesting the firm is not trying to drive competitors out of the market simply to maintain market share. That may be the case but Rio’s 20% is of a much larger pie today. The company plans to ship about 350 mt of iron ore in 2015.

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Financial moves and comments from the Federal Reserve dominated today’s MetalCrawler.

Yellen Says Stocks Could be Overvalued

Federal Reserve Chairwoman Janet Yellen on Wednesday said high equity valuations could pose potential dangers but that stability risks across the US financial system remained in check.

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“I would highlight that equity market valuations at this point generally are quite high,” Yellen said. “There are potential dangers there.”

Yellen’s view on the run-up in stocks was an answer to questions from International Monetary Fund Managing Director Christine Lagarde, who joined the Fed chief for the opening session of the “Finance and Society” conference.

Quebec To Help Cliffs Sell Iron Ore Mine

The Canadian Province of Quebec is prepared to buy a rail line and port facilities that service a shuttered Cliffs Natural Resources Inc. iron-ore mine there to pave the way for the operation to reopen under new owners. The government also is open to buying 20% of the Bloom Lake mine to facilitate a deal, Economy Minister Jacques Daoust said. Purchasing the rail and port facilities could lower the mine’s operating costs by as much as $20 a ton, he said.

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While India leads the world in Direct-Reduced Iron production, the domestic industry has been facing an uphill production battle for the last four years.

Why Manufacturers Need to Ditch Purchase Price Variance

India’s DRI sector is hoping for help from the government and clarity in the overall steel policy to see it through, what many have dubbed, its most critical phase ever.

Demand DRIs Up

What is worrisome is that the falling demand for steel, especially construction steel globally, could further, negatively impact the sector. Some are quick to note that India’s DRI units need not worry much on this front as the market in India has remained insulated from global trends owing to steadily increasing domestic steel consumption.

Two other risks facing the sector are imported scrap being used by steel companies in India, DRI is an excellent substitute for scrap in electric arc furnaces, and the reliance by medium-sized DRI producers on inferior technology. That means technological limitations stop the producers from exploiting inferior grades of iron ore and coal.

Further, the limited availability of coking coal only motivates steel production in the country through a combination of DRI and blast furnace. What has added to the misery is the recent round of coal auctions held by the federal government.

Unable to Bid in Coal Auction

DRI companies were unable to participate in the auction, and a hitherto discounted source of fuel was lost, pushing the cost of DRI production by an estimated 40%, some have said. The DRI segment has brought this to the government’s attention.

While many steel companies prefer to use DRI instead of scrap, the slowdown in the global steel industry has seen some amount of the steel melting scrap being imported into India because of lower import duties. What makes steel plants happy in such cases, besides the cheap duty, is the fact that the imported scrap percentage works out to be higher, which eventually negates the cost of imported scrap.

To many analysts, the DRI sector in India is poised on the cusp of a turnaround, but only if there is adequate government backing as well as support from domestic steel companies. Even then, it could easily take four years for the industry to come back to an even keel and ramp up production.

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