Iron Ore

Existing home sales are up and a major iron ore producer reported plunging profits and cut its steel outlook.

US Existing Home Sales Surge

US Home resales rose to a near 8-1/2-year high in July, Reuters reported.

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While other data on Thursday showed a slight increase in the number of Americans filing new applications for unemployment benefits last week, the trend remained consistent with strong labor market momentum.

The National Association of Realtors said existing home sales increased 2% to an annual rate of 5.59 million units last month, the highest pace since February 2007.

Demand for housing is being boosted by a strengthening labor market. But supply remains tight, pushing up home prices and sidelining first-time buyers, who are a key part of a strong housing market. The share of first-time buyers fell to a six-month low of 28% last month.

BHP Billiton Reports Profit Plunge, Cuts Outlook

BHP Billiton Ltd. reported full-year profit plunged 52% on tumbling commodity prices and cut its long-term forecasts for steel output in China, its largest customer.

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Underlying profit was $6.4 billion in the year ended June 30 from $13.3 billion a year earlier, the world’s biggest mining company said Tuesday in a statement. BHP will increase its dividend by 2.5 percent to $1.24 a share.

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Following our recent article on the seaborne iron ore market, some may assume the landlocked domestic contract supply market for iron ore and pellets is immune from the volatility found in Asia.

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To some extent that’s true, there isn’t a spot or futures market in the same way as we see in Asia, but the market is far from immune to global prices and prices have fallen in North America as they have elsewhere.

That makes Essar Steel’s decision to proceed with the massive $1.9 billion development of North America’s richest iron ore deposit across 150 kilometers of Minnesota’s Mesabi Iron Range particularly brave in today’s market.

Source FT

Source: Financial Times

Essar Steel is said by the Financial Times to be ramping up construction on a $1.9 billion mining and processing facility, with a planned completion in the second quarter of 2016. It will be one of the largest construction projects in North America by capital expenditure according to the paper and Essar hopes to produce 7 million metric tons annually of high-grade iron ore pellets for 70-80 years from the resource.

Why Iron Ore? Why Now?

With Iron ore prices plunging you may ask what would possess them to embark on such a venture, but Essar would say they expect the price to come back and indeed have made much of their expectation that the US will see rising steel demand, particularly for the high-grade steel used in automobiles and advanced manufacturing.

Madhu Vuppuluri, chief executive of Essar Steel is quoted as saying “Due to the infrastructure revival that is likely to take place here in North America, the US and Canadian steel industry will remain robust moving forward.”

In 2013, the American Society of Civil Engineers estimated that $3.6 trillion in investment was needed by 2020 to return US infrastructure to its optimal state but whether any of that expenditure will be made is another matter. Robust state is also an interesting turn of phrase. North American steel producers would be more likely to say they are in a pitched battle against a flood of imports. US steel mills have had to lay off workers as cheap imports have undermined domestic production.

Source: FT

Source: FT

Imports have stabilized. If averaged over the first half of the year, they are up some months and down others, but in a falling market the percentage they take is probably less of an issue than the depressing impact they have on domestic prices.

Expanding From a Position of Weakness

Essar is not exactly in a rock steady place financially, either. their Canadian steelmaking operation recently emerged from bankruptcy protection and their Indian parent has had to sell a 49% stake in its main oil refinery to Russia’s Rosneft to pay down debt.

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Such a project, though, will be measured over the longer term. The price has time to recover before pellets are ready for delivery later next year but, as the FT concluded in a closing comment from Tony Barrett an economics professor at the College of St Scholastica in Duluth, Minnesota and an expert on the local mining industry, who said “Essar couldn’t have timed this worse. You just have to ask yourself, ‘is this going to make money over the next 30 years?’”

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Just when iron ore miners thought sentiment couldn’t get much worse, Goldman Sachs Group comes out with a report predicting iron ore prices will tumble by 30% over the next 18 months according to a Bloomberg article this week.

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The bank is saying the rebound seen over the last five weeks is merely a blip and that normal business will shortly resume.

Source: FT

Source: Financial Times

Supply growth is set to continue, the report states, but, and this is crucial, China has reached peak steel and from now on steel production will only contract in China.

More Inventory Than Necessary

As shipments pick up from Australia, Brazil and India, the seaborne market will become awash with inventory and prices will be further driven down. Iron ore is seen by Goldman as averaging $49 a ton this quarter, and $48 in the final three months of 2015. Before falling further next year to $46 in the first quarter and $44 the following quarter. With little or no market discipline, the bank suggests 2016 will see average prices around $44 per ton. In the words of the report’s authors “the summer of 2015 is the calm before the storm.”

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Steel consumers can, therefore, expect mills’ raw material prices to continue to weaken as seaborne prices gradually knock on to contract prices elsewhere. With demand lackluster and too much finished steel chasing too few orders, even as markets like North America and Europe show encouraging signs of GDP growth, steel prices will have little to support them this year and next. Good news for consumers, tough times for producers working with low-capacity utilization and stronger domestic currencies sucking in imports.

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Two massive explosions damaged a major port in China and with oil prices falling again, US shale producers are looking to make a deal.

Tianjin Explosions Damage Port Terminal

Two massive explosions at the Chinese port of Tianjin that ripped through parts of the terminal have disrupted iron ore import operations, as well as disrupting oil tanker arrivals and departures at this gateway to northeast China.

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The blasts killed at least 44 people and injured more than 500, officials and state-run media said on Thursday.

Crude Oil Prices Bring Shale Extractors Back to the Table

A renewed slide in crude oil prices is having the effect US energy sector dealmakers and private equity managers have been looking for: oil companies are now returning calls from potential buyers. Throughout much of the crude market rout that started in mid-2014 oil firms could rely on generous capital markets investors betting on a quick recovery in prices, which made any asset sales look unattractive.

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Vale SA returned to profitability for the first time in a year today and low prices have led to a copper scrap and concentrate shortage in China.

Vale Posts Profit

Brazil’s Vale SA, the world’s largest iron ore producer, returned to profit in the second quarter, bolstered by higher output and cost cuts as it kept up pressure on Australian rivals in the fight for market share.

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The miner overcame a slump in iron ore prices to report a net profit of $1.68 billion on Thursday, moving into the black for the first time in a year. That was a leap of 17.3%from the same quarter a year ago, and more than four times the average forecast of $408 million of six analysts in a Reuters poll.

Copper Scrap Shortage in China

Chinese copper smelters may not get enough raw material after domestic mines and scrap providers scaled down sales because of low prices, which may force some smelters to trim production in the third quarter, industry players said told ThomsonReuters on Wednesday.

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Gold miners saw their stock values plummet with the price of the yellow metal on Monday. BHP Billiton is investing $240 million in its Western Australia iron ore tug boat and port business.

Gold Sell-Off Hits Miners Hard

The steep sell-off in shares of gold miners, tracking a plunge in the metal’s price, wiped out more than $8 billion from their combined market value on Monday and pushed a global index of gold stocks to a six-and-a-half-year-year low.

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The Thomson Reuters Global Gold index slumped 8.5% to its lowest since late 2008, the biggest one-day percentage drop in two years, after gold prices sank.

BHP Investing in Infrastructure

BHP Billiton said today it will spend $240 million upgrading its marine iron ore facilities in Western Australia. The funds will be used to purchase six tug boats and build a new tug harbor in Port Hedland’s inner harbor, with construction due to be completed in September 2016.

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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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