Tweet

By Kishori Krishnan Exclusive To Iron Investing News

The closure of major steel operations in the Hamilton area are set to reverberate around the economy, potentially affecting everyone from iron ore producers in Quebec and Labrador to coal companies in Western Canada. Pittsburgh-based United States Steel Corp. has said it will indefinitely idle operations at its Hamilton and Lake Erie plants, putting 1,500 people out of work.

The closures are the first time the company, formerly known as Stelco, has shut down its Ontario steel mills in nearly a century of operations. Patricia Mohr, commodity market specialist at Scotiabank, said the U.S. Steel Canada closures are part of a pattern that has seen global production of carbon steel drop by approximately 27 per cent in 2008.

“Global production of ordinary carbon steel is down hugely, and the shutdown of Stelco is just part of that overall pattern,” Mohr said. She added that although U.S. Steel’s Hamilton-area operations are “fairly small on the global landscape” when compared to massive steel mills in Japan, South Korea and China, it could have some impact on Canadian coal producers like Teck Cominco Ltd. (TSX:TCK) which are already suffering from the general downturn in demand for coking coal to produce steel.

Integrated steel companies such as U.S. Steel operate big blast furnaces, which use coking coal, iron ore pellets and other materials under extreme heat to smelt metal. Steel production and prices, which reached all-time highs last year, have dropped to their lowest levels in a quarter century in recent months. In Canada, steelmakers such as the former Algoma Steel (AGA-T), Ipsco (NYSE:IPS) and distributor Russel Metals (TSX:RUS) have cut jobs and streamlined operations to deal with the industry downturn.

Battle royale

Another battle may be shaping up between China and Japan. This time, it’s over iron ore. Huge iron ore demand from Asia is also causing a run on Canadian iron ore deposits.

China’s enormous appetite for iron ore (about 500 million tons a year) has allegedly been the major factor behind last year’s enormous price increases and profits in the iron-ore industry around the world. Without China’s voracious need for iron ore, such huge price increases would have been impossible, analysts maintain. Although China has some iron-ore reserves, the quality and quantity of those reserves is lacking. Japan, like China, is also a net importer of iron ore for its steel industry, as Japan has no domestic reserves.

Net result today: outside China’s biggest iron-ore port, Rizhao, in Shandong province, 10 ships sit waiting to unload their cargo. Many of them came from the Pilbara, carrying the iron ore that once fuelled a Chinese economy that drove the mining boom that, in turn, underwrote a cycle of super profits for Australia.

But on the wharves of the bustling harbour, millions of tonnes of ore sit in stockpiles, yet to feed the once-hungry mills. Almost 7.2 million tonnes of ore was stocked at the port at the end of last month, a 200,000-tonne increase on a week earlier.

Figures released by the Australian Bureau of Statistics showed iron ore earnings jumped 15 per cent in January to $3.08billion – the country’s fourth-highest monthly total – as spot prices rose, volumes increased and the dollar fell. Analysts say, iron ore spot prices could fall further as Chinese steel and iron ore stockpiles continue to grow. This would create further problems for Australian miners as they negotiate annual contracts.

ANZ is the latest commodity forecaster to warn of changing conditions in the Chinese steel market, saying it expects forecasts to be revised down in coming weeks. “Economic data remains weak and steel inventories have turned sharply higher,” ANZ’s head of commodities research Mark Pervan said. “The worry for iron ore and coal producers is that high steel stocks will allow steel consumers to delay purchases for some time – creating further downward pressure on China steel prices and, ultimately, iron ore prices.”

Iron ore spot prices into China fell 10 per cent last week to $US67.50 a tonne, according to Metal Bulletin. They are now sitting just above the low of $US63.50 in November as steel mills deferred shipments. Mr Pervan, who is forecasting a 40 per cent drop in iron ore contract prices this financial year, said higher-end market forecasts of a 20-30 per cent cut would probably be revised down.

However, Macquarie analyst Jim Lennon said spot prices 40 per cent below contract volume looked to be driving too much production out of the market, while at a 20 per cent discount, the market became oversupplied. “The equilibrium price is somewhere in between,” he said in a report at the weekend.

Junior miner

An iron miner’s strategic financing discussion generated much speculation. Consolidated Thompson Iron Mines (TSX:CLM) shares climbed 35 per cent after the miner announced that it is in advanced discussions in respect of a possible strategic financing and offtake arrangement. This was in response to a request from the Investment Industry Regulatory Organization of Canada relating to the recent increase in trading activity and share price.

Comment

Tweet