By Kishori Krishnan Exclusive to Iron Investing News

The second week of February brings some cheer for the iron ore sector. There are very initial signs that contrary to analysts’ expectations at the start of the year of a drop of about 40 per cent in iron ore prices this year, improving sentiments may not see such a drastic plunge.  

The latest Fitch Ratings report stated that iron ore prices are likely to decline by 15-20 per cent this year on falling demand from global steel producers because of production cut. There are many factors being attributed to this. Demand for steel, the main user of iron ore, is expected to rise by the end of the first quarter, Lou Schorsch, head of the flat-rolled business in the Americas for Luxembourg-based ArcelorMittal, the world’s largest steelmaker has said.

The Age reported that iron ore is recovering from a 3-year low just as Vale, Rio Tinto and BHP Billiton start talks with Asian steelmakers to set prices for annual supply contracts. Hopes are also pinned on another round of iron prices negotiations between Chinese steel makers and global mining companies scheduled this week. Analysts said the general sentiment in the market was improving, albeit mildly.

At the start of the week, an analyst with Goldman Sachs was quoted as saying that there were signs that before that the cycle trough may be reached, the probability had increased that iron ore negotiations could produce a better outcome than the 30 per cent drop forecast earlier. Ric Ronge from Pengana Capital in Melbourne said that the tone of the iron ore market had definitely changed. The outcome might not be so dire. Michael Rawlinson, head of mining resources and energy at Liberum Capital said that the increase in the spot market may limit the decline in contract prices. Andrew Driscoll, head of resources research at CLSA Asia Pacific Markets said that Australian iron ore for immediate delivery is now just 15 per cent less than the 2008 contract price.

India’s iron-ore export prices are expected to double from last year’s low as China hikes it purchases. R.K. Sharma, secretary general of the Federation of Indian Mineral Industries, a group of iron-ore miners, said prices for immediate delivery were expected to increase to as much as US$90 a metric ton in the “near-term” from US$45 in November. Prices are currently about $84 a ton. India’s iron-ore exports in December rose 38 per cent, the first gain in eight months.

International prices of iron ore and coking coal, the main steelmaking materials, had surged to a record last year. In fact, for the last four years, prices had touched new highs, following a surge in demand, especially from China. Towards the  last quarter of 2008, though, thanks to the recession and falling demand, the price of steelmaking raw material declined from the peak of $145 per tonne in July to $65 per tonne by December, on China’s disinterest on revamping closed steel mills after the Beijing Olympics. All this had also resulted into a huge inventory pile-ups which, with declining exports diverting supply to domestic markets, put prices under more pressure.

Charles Kernot, a mining analyst at Evolution Securities said that “while of course China is important for iron ore demand, it is only one part of the global steel market. When you have companies like Honda saying they are closing plants and cutting production, it is impossible to ignore.”

China town

Meanwhile, China is keeping a watch on the U.S. stimulus plan. News agency Reuters said China’s steel industry was keeping a wary eye on Washington’s Buy American plan, as it could see sales hurt if imported steel is excluded from infrastructure projects funded by a $900 billion stimulus package. The U.S. Senate voted to soften language in the original stimulus bill, which had required that all public works projects funded by the stimulus package use only US-made iron, steel and manufactured goods.

“If Americans only buy American and Chinese only buy Chinese, what will be traded around the world?” said Shan Shanghua, Secretary-general of the China Iron and Steel Association, which represents the country’s largest steel mills. China’s biggest steel product export to the US is steel pipe, Shan said, but its mills also supply lower-value construction steel to North America.

“We have to see how much infrastructure investment is included in the stimulus plan,” said Qi Xiangdong, vice secretary-general of the association. “If there’s a lot, US steel demand will rise, and that will affect the pattern of import demand, not just from China, but from the rest of the world,” he was quoted by the news agency.

China’s steelmakers, which cut production in the second half, are benefiting from the government’s CNY 4 trillion stimulus plan to spark slowing economic growth. Shares of Vale, Rio and BHP, which ship 75 per cent of the world’s iron ore and depend on China for about 20 per cent of their sales, have gained more than 50 per cent since their lows in 2008.

Last year, about 42 mini steel mills in and around Shanghai were forced to suspend production because of a preventive measure for the Olympic Games preparation in September. But these steel mills delayed resumption because of global economic slowdown that resulted into lower steel demand. These mills are gradually coming on stream now, which is likely to revive iron ore demand from India, an exporter said. Any upturn in demand from China and infrastructure spending in India may boost domestic iron ore and steel demand.

“We have seen in the steel business in China probably that the destocking cycle is almost complete, and that means people are coming back into the market and buying,” BHP Chief Executive Officer Marius Kloppers told reporters in Sydney. “You are starting to see the underlying demand of the Chinese economy.”

In 2008, the highs seen by iron ore prices in most of 2008 were a function of the convergence of a number of factors related to demand and supply, freight and foreign exchange that are now unwinding. Given the steel inventory that is piling up on fewer construction and infrastructure activities, the existing capacity will be under tremendous pressure despite limited capacity additions coming up in 2009.

Fitch believes steel demand in India would improve following the aggressive expansion of Central Bank liquidity provisions since early September, in combination with major fiscal injections into the US and European banking systems, as well as major stimulus packages announced for China and expected for the US.

Other news

BHP, (ASX: BHP) the world’s largest mining company, announced that its iron ore earnings before interest and tax had more than doubled to $4.14 billion in the second half of 2008, while total net income fell 57 per cent. Every $1 change in the price of a ton of iron ore affects net profit by $80 million, BHP said. Net income in the fiscal second half ending June 30, will drop 45 per cent to $5.2 billion, according the median of three analyst estimates compiled by Bloomberg.

The Financial Times has reported that ArcelorMittal (NYSE:MT) is set to see its profits fall this year by more than half as a result of the steep downturn in the steel industry. The world’s biggest steelmaker looks likely to turn in earnings before interest, tax, depreciation and amortisation of about $11bn for 2009. The verdict shall be known when Laksmi Mittal announces the company’s financial results for 2008 on February 12. ArcelorMittal has also outlined details of a plan to reduce support staff in France by 1,400 through voluntary departures, trade unions said.

Insteel Industries Inc. (Nasdaq: IIIN) today announced that its board of directors had declared a quarterly cash dividend of $0.03 per share on the company’s common stock payable on April 3, 2009 to shareholders of record as of March 20, 2009. Insteel is one of U.S.’s largest manufacturers of steel wire reinforcing products for concrete construction applications and is headquartered in Mount Airy, North Carolina. It operates six manufacturing facilities located in the United States.

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