Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Solving the Global Iron Ore Shortage

Commodities / Metals & Mining Dec 04, 2010 - 05:21 AM GMT

By: The_Gold_Report


Best Financial Markets Analysis ArticleIf there is one thing UBS Securities' Dieter Hoeppli knows it's steel. As global head of steel, as well as metals and mining in the Americas for UBS, he's spent the last 20 years analyzing the steel business and acting as an advisor on countless mergers and takeover deals. He regularly travels the world and crunches numbers to determine what's going to grow and what's not. In this Gold Report exclusive, we take you inside the recent Forbes & Manhattan summit for some of Dieter's candid thoughts on the shortage of iron ore global steel manufacturers are now facing.

"I am bullish about steel, I think steel has a great future," said Dieter Hoeppli, managing director of UBS Securities' steel and metals group in New York City, during a presentation at the first annual Forbes & Manhattan Resource Summit in West Palm Beach, Florida.

"There is a lot of infrastructure to be built if you go to places, such as India and Brazil, which I came from this morning," he added. "You see a lot of activity taking place; that's going to run for the next 5 or 10 years and a lot of steel is going be consumed for that."

Annual global steel production went from 770 million tons (Mt.) in 1990 to 847 tons in 2000 to roughly 1,367 Mt. in 2010. Steel production is expected to have a compound annual growth rate of 5.6% in each of the next two years and total production should reach 1,524 Mt. in 2012.

Moving Away from the U.S.

He noted, however, that biggest change from 1990–2010 is where steel is manufactured. In 1990, Russia made about 20% of the world's steel; but by 2010, Russian production accounted for just 8%. European and North American steel production witnessed similar or even more drastic declines. And most of that production has shifted to Asia, which now produces about two-thirds of the world's steel.

In 1994, only four of the world's top-40 steel producers were Chinese companies, whereas six were American. Today, seven are based in China and just two are left in America.

Dieter said that shift has brought with it the disappearance of well-known steel companies like Bethlehem Steel and British Steel. Those names have been replaced by new ones like ArcelorMittal (NYSE:MT), Nucor Corporation (NYSE:NUE) and Nippon Steel Corporation (OTC:NISTF; OTC:NISTY).

"These are the new leaders in the industry," Dieter said. "They are more nimble, further diversified and many of them are backward integrated into raw material."

Merger and acquisition (M&A) activity in the steel sector peaked in 2006 with 27 deals valued at nearly $60 billion. The number of deals picked up pace following that year, with 39 deals worth roughly $37.3 billion in 2007 and about $20 billion over 32 transactions in 2008. As of Nov. 1, 2010, M&A activity stood at 13 pacts valued at $5.4 billion.

Dieter said the key development in consolidation was the creation of large steel companies with numerous blast furnaces that give them greater production flexibility. In the '90s, many of the small steel companies had but a single furnace, which meant it had to be kept running, even at a loss.

India and Brazil Poised for Future Production Growth

Dieter expects future steel production growth to come from India—a country with a population that rivals China but that only produces about 60 Mt. of steel annually, versus China's roughly 600 Mt. He cautioned, though, that steel production growth in India could take some time.

"India is a very difficult place to build new capacity," Dieter explained; "acquiring land in India and getting permits can take a very long time. Pohang Iron and Steel Company (POSCO) (NYSE:PKX) announced a $10 billion investment in a steel plant [in India] about seven years ago. It still hasn't broken ground."

He also sees steel production growth coming from Brazil.

"The BRIC countries [Brazil, Russia, India and China] are going to be the [production] drivers while in more developed markets, we will still have excess capacity," Dieter said.

From July 2008 until mid-2009, North American steel production operated at just over 40% of capacity—even below the levels of the 1982 recession when steel production plummeted to about 70 Mt. from 110 Mt. in 1981. Dieter noted that it took North American steel producers 15 years to return to the 1981 production mark.

It may not take as long this time, however, given that higher steel prices have boosted North American steel production to 70% of capacity—an increase of about 30% since 2008.

The price of hot rolled coil is at roughly $550/ton, up from a low of roughly $210/ton in the late 1990s but down from a peak of $1,100 in 2007.

Dieter believes steel makers can make money selling steel at $550/ton but that the rising cost of raw materials has forced steel producers to get directly involved in mining them to reduce costs.

"If they're not backward integrated, most steel companies are not making money today," he noted.

Dieter said there are three main sources of raw material—scrap, iron ore and metallurgical coal.

Scrap prices have skyrocketed from $80/ton in recent years to around $300/ton now, while iron ore prices went from $35/ton in 2005 to between $150 and $175 per ton today.

He said this has led to a change in iron ore contracts. Deals used to be done annually but now prices are adjusted quarterly using a system similar to spot prices—an arrangement that largely favors the iron ore producers.

"[The new system] is very positive for the iron ore companies, but more challenging for the steel companies," Dieter said. He noted that in the near term only two of those raw materials would be in short supply—metallurgical coal and iron ore.

Metallurgical coal (met coal) is used as a fuel and as a reducing agent in smelting iron ore in a blast furnace. The supply deficit in met coal, Dieter said, has led to prices reaching $210/ton, up sharply from $50 per ton in 2001. What's more, steel companies are moving upstream into coal mining operations to reduce or stabilize their costs.

Dieter said there is a similar shortage of iron ore but that by 2015 the deficit would become a surplus after several significant iron ore projects in Brazil and Australia reach production.

Iron Ore Leads Pack

But when it comes to value creation in the steel sector, iron ore clearly leads the pack. Over the previous five years, the prices of iron ore companies have risen a collective 400% owing largely to the growing number of takeovers. Over the same timeframe, steel companies were up a combined 12.1%. Met coal and scrap iron companies were up 34% and 28.1%, respectively.

Although the value of steel companies increased only 12% over the last five years, the value of steel companies based in Latin America increased by a staggering 165%. The value of their Asian counterparts, meanwhile, decreased 31.1% over the same period. Dieter said Latin American steel companies often have the advantage of owning their iron mines, whereas most Asian steelmakers work with tight margins because they have to buy iron ore at market prices.

In the question and answer session following Dieter's presentation, he was asked about consolidation in Quebec's North Shore where a number of iron ore players operate within spitting distance of each other.

The players include Iron Ore Company of Canada (IOC), the majority of which is owned by London-based Rio Tinto (NYSE:RIO; ASX:RIO); ArcelorMittal subsidiary, Quebec Cartier Mining; Cliffs Natural Resources Inc. (NYSE:CLF), which acquired Wabush Mines earlier this year, mostly to keep Wasbush's iron pellet plant out of the hands of its competitors; Consolidated Thompson Iron Mines Ltd. (TSX:CLM), an iron concentrate producer; and the only junior in the camp, Alderon Resource Corp. (TSX.V:ADV; OTCQX:ALDFF), which resides under the Forbes & Manhattan banner.

Quebec's North Shore features a geological belt known as the Labrador Trough, which first witnessed iron production in 1954. Iron mining continued unabated until steep drops in iron ore prices forced IOC to shutter its operations in 1982.

The camp underwent a renaissance when steel prices started to rebound in the early part of the previous decade. The iron mines in Labrador are served by two rail lines that link to a year-round ocean port at Sept-Îles, Quebec, an advantage not lost on Dieter.

"The mine body is important but logistics are as important. And what's very attractive about the North Shore is that you have two rail lines in place that have lots of capacity," he said. "Consolidated Thompson has shown it can get ore concentrate down to the port at $30/ton. It's highly competitive to produce up at the North Shore. . .Clearly, Consolidated Thompson could be one of the chips that could fall."

Dieter then discussed other targets. His thesis involved U.S.-based AK Steel Holding Corporation (NYSE:AKS), which posted a loss in the recent quarter due to a 100% increase in the cost of iron ore. He said companies like AK Steel, which has a market cap of $1.4 billion, are forced to look at only the smallest fish to meet their iron needs.

"I think there is going to be a renewed focus on attractive companies with great ore bodies, Dieter said, "which I think Alderon Resource has in areas with logistics already in place, where you can actually bring the product to the market in a reasonable period of time."

"Clearly, raw material is an absolutely critical factor in steel manufacturing and I'm sure Alderon is going to play a major role in that," Dieter said.

Want to read more exclusive Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Expert Insights page.

1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Gold Report: Timmins.
3) Ian Gordon: I personally and/or my family own shares of the following companies mentioned in this interview:Timmins Gold, Golden Goliath, Millrock and Lincoln. My company, Long Wave Analytics is receiving payment from the following companies mentioned in this interview, for receiving mention on my website, Golden Goliath, Millrock and Lincoln Gold.

The GOLD Report is Copyright © 2010 by Streetwise Inc. All rights are reserved. Streetwise Inc. hereby grants an unrestricted license to use or disseminate this copyrighted material only in whole (and always including this disclaimer), but never in part. The GOLD Report does not render investment advice and does not endorse or recommend the business, products, services or securities of any company mentioned in this report. From time to time, Streetwise Inc. directors, officers, employees or members of their families, as well as persons interviewed for articles on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.

© 2005-2019 - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.

Post Comment

Only logged in users are allowed to post comments. Register/ Log in